Beware of the catches

PEPS AND TESSAS
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The Independent Online
THOUGH originally designed for simplicity, the current generation of Tessas carries a tangled web of complicated features and penalties. People rolling over their old Tessas or picking new ones must examine product details carefully to avoid making an expensive mistake.

If your first Tessa is coming up for renewal and you want to put some or all of the capital into a second one, you should make sure you do so within six months to be able to roll over the full pounds 9,000 tax-free. If you don't, you are back to the investment limits for first Tessa investors: pounds 3,000 in the first year and pounds 1,800 in subsequent years up to a maximum of pounds 9,000. You should make sure you get hold of a certificate of entitlement from your current provider to switch more than pounds 3,000 of capital to an alternative follow-on Tessa pro- vider. However, before deciding to go elsewhere second time round, it is worth checking to see if you can do better with your present provider. Some offer preferential rates to current customers to retain their loyalty. The Clydesdale Bank, for example, has a fixed rate of 8 per cent for those rolling over the full pounds 9,000, compared with 7.4 per cent fixed for individuals transferring from other firms.

There are different products on offer for follow-ons and virgin Tessa investors. The former tend to offer the better interest rates. So if you are starting out for the first time, look carefully at the headline rates being promoted. Also, if you want the flexibility to change providers, beware bonuses, like that of the Halifax, that only apply at the end of the five-year term.

A recent Which? magazine survey pointed to a gap of pounds 1,100 between the best and worst performing variable-rate Tessas over the past five years. On average banks fared pounds 300 worse than building societies. Banks have been particularly criticised for their tactic of tempting savers in with initial high rates, only to leave them to languish at uncompetitive levels as the five-year savings term has progressed.

Exit penalties, should you wish to change to another product during the savings term, can be onerous. If you have any thought of transferring avoid companies such as Sun Banking Corporation, where you will forfeit 180 days of interest, and be forced to give 180 days' notice before quitting its fixed-rate follow-on Tessa. The Bristol and West equity-linked Tessa charges six months interest, plus a pounds 1,000 fee. Further, if you are likely to need to withdraw interest before the end of the term, check this facility is available. The Skipton building society and the Royal Bank of Scotland, for example, do not allow this.

Another tricky little catch to look out for is where companies, such as the Royal Bank of Scotland, do not pay compound interest. This reduces the final payout. Customers should ask providers to provide projections of their payouts.

A popular wheeze is where companies insist on feeder accounts, where you must deposit your money before it is admitted annually into the Tessa. Some give a lower rate of interest on savings in the feeder accounts - Market Harborough building society, for example. Other companies providing first-timer Tessas insist each year's tranche of money is fully funded, up to the maximum of pounds 3,000 in the first year, and pounds 1,800 after that. One final issue to be aware of is whether the Tessa provider you opt for is a building society in the course of demutualising, or likely to demutualise in the course of the five-year term.

Customers who have invested their first Tessas in the National & Provincial, Halifax, Leeds, Woolwich and Alliance & Leicester building societies should beware of moving to another Tessa provider if the first Tessa has matured. You might reduce or even lose your windfall entitlement.

Tessas are considered share accounts and so are eligible to a share in the demutualisation bonanza of free shares or cash, if opened before the initial qualifying date. Rolling over into a new Tessa with the same society, or switching to another account with share status, should not upset your eligibility, but do check with your society.

Typically you will have to keep some money with the society right through until the conversion or takeover is complete. In addition, societies typically have two or more qualifying dates, with the lower or lowest on these dates dictating the size of the windfall.

The Halifax has announced plans to send out a notice six weeks before the second qualifying date, to allow customers to make up their investment to the former level, to qualify for maximum bounty.

The Woolwich, however, reserves the right to spring the second date on members retrospectively. The Alliance & Leicester has yet to disclose whether its share handout will include a distribution related to the size of balances, or simply a basic handout.

Investors not involved with these societies, but looking to give a speculative spin to their Tessas, could do worse than put money into one of the societies tipped for demutualisation, which would mean more payouts for savers. Graham Hooper, the investment director of Chase de Vere, a firm of independent financial advisers, says he would put his money on Bristol & West announcing demutualision plans this spring. He also says Northern Rock is a good bet. Its interest rates are competitive, and it is another of the remaining societies that could be attractive to a predator.

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