Best and worst: Interest rates on Tessas

SHOPPING around for a Tessa - a Tax Exempt Special Savings Account - could make a difference of nearly pounds 100 in extra interest payments in the first year alone.

Tessa interest rates have fallen by more than half since the product was launched three years ago. Base rates were then about 14 per cent compared with 5.5 per cent.

However, there is a difference of more than 3 per cent between the top performing accounts at 7.75 per cent and the bottom rate of 4.5 per cent.

Savers are allowed to invest a maximum of pounds 9,000 in a Tessa over five years. The maximum amount that can be invested in the first calendar year is pounds 3,000, with each consecutive year having a maximum investment of pounds 1,800.

The interest earned on a Tessa is tax-free, providing the capital is left untouched throughout the five years.

The interest on a Tessa earning 7.5 per cent with the maximum invested would be pounds 622 at the end of the second year.

On a 4.5 per cent interest -bearing account the interest would be pounds 357 at the end of the second year.

Many Tessas carry transfer penalties in the form of loss of interest or a flat fee of up to pounds 50.

For example, somebody who wished to transfer from the Hinckley & Rugby Building Society would suffer a loss of 90 days' interest - one of the highest transfer penalties in the market.

Some of the Tessa providers with the poorest rates are those that raise money purely through the money markets, where the rates are lower than the base rate. Gartmore said that the low rate offered by its product was a true reflection of the rates available on the money markets. Antony Myers, managing director of Gartmore money management, said: 'It is well known that Tessa rates from other providers are heavily subsidised.'

For instance, building societies and banks would be able to keep Tessa rates high by not passing on interest rate cuts to their borrowers.

Lloyds Bank launched its Tessa in 1991 with an interest rate of 13.5 per cent - then 0.5 per cent below the base rate. The bank has a transfer penalty of 1 per cent with a pounds 25 minimum charge. Lloyds said that the rate on its Tessa accurately tracks the base rate.

Peter Hammond of the Bank of Ireland said that the bank was not really competing on Tessa rates in the UK and offered the product as an extra service to its customers. Tyndall put its low rate down to the fact that over the last year the rates on the money markets had been below the base rates.

Hinckley & Rugby Building Society said that it had made a commercial decision to keep the rate high.

------------------------------------------------------------------------ INTEREST RATES ON TESSAS ------------------------------------------------------------------------ The best % 1 Hinckley & Rugby 7.75 2 Dudley 7.57 3 Dunfermline 7.55 4 West Bromwich 7.50 4 Progressive 7.50 The worst 97 First Direct 5.00 97 Lloyds 5.00 99 Tyndall 4.83 100 Bank of Ireland 4.75 101 Gartmore 4.50 ------------------------------------------------------------------------ Source: Moneyfacts. ------------------------------------------------------------------------