Accounts that are spiced with stocks

TESSAS can be a convenient, tax-efficient way of making the best use of a deposit account. But rising share prices can leave savers wondering if their money might not be better invested in the stock market rather than sitting safely in a boring Tessa.

One way to get the best of both worlds is to invest in an equity-linked Tessa. These work just like any other Tessas but instead of the provider deciding how much interest you earn, returns are linked to the performance of the stock market.

"The main advantage of these Tessas is that you can potentially earn higher rates of interest," says Mark Dixon, head of product development at HSBC. "These Tessas allow the more adventurous investor to benefit from the added growth potential of stocks and shares."

Unlike most stock market investment, with an equity-linked Tessa there is no risk to your capital. If the market falls, your original investment is safe. In fact, most equity-linked Tessas guarantee a minimum return.

The amount of interest you eventually earn will depend on how well the stock market performs and the terms of the Tessa. Usually the FT-SE 100 index is used to calculate performance and there is often an upper limit on the amount of interest you can receive.

Equity-linked Tessas are issued in tranches, and are only available for a set period of time. Minimum investments are typically pounds 3,000 or pounds 9,000. These types of Tessas are being offered by Abbey National, Birmingham Midshires Building Society, Bristol & West and HSBC.

With the typical fixed-rate or variable-rate Tessa paying 7 to 8 per cent a year, a total return of 50 per cent on an equity-linked Tessa, which averages out at 10 per cent a year, looks attractive. But there are no guarantees the equity-linked Tessa will achieve this and the minimum returns can look less impressive.

"A minimum return of 20 per cent on a Tessa, is worth 4 per cent a year," points out Mark Howard, managing director of independent financial advisers Maddison Monetary Management. "For risk-averse investors these Tessas are not a good idea because you could end up with just the guaranteed minimum if the stock market crashed close to maturity. But the upside is that if the market moves forward you could benefit from above average Tessa returns."

The withdrawal penalties on all these Tessas are also stiff. So if you think you may not be able to keep your Tessa to maturity, don't invest.

q Contacts: Abbey National, 0800 100801); Birmingham Midshires, 01902 302883; Bristol & West, 0800 202121; HSBC, 0800 289505.