Investing For Growth: The discreet charms of the 'deathbed' Tessas

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The Independent Online
THEY may have come under a lot of flak in recent times for offering scant reward, but the death of the Tessa has been exaggerated. Investors who expect modest but tax-free returns should look for a Tessa before these savings plans disappear in April.

Run by banks and building societies, a Tessa is a savings account which pays gross (pre-tax) interest. Left to grow for five years, it provides a tidy lump sum on maturity without any of the headaches associated with stock market investments.

After 5 April, the Government will prevent any more Tessa accounts being opened, but existing plans will be left for the full five years. It is worth sparing a few pounds to get a Tessa up and running. Then you have the option to invest as little or as much as you like so long as you don't exceed the annual maximum.

But if you are paying in the full annual amount - and some providers will not accept smaller sums - you may find you can get better rates of interest elsewhere. So it is a good idea to check the rules before you open your Tessa.

The annual limits allowed by the government are pounds 3,000 in the first year; pounds 1,800 in years two to five and pounds 600 extra if you have paid in the full amount in the first four years.

Over the five years, it adds up to a maximum of pounds 9,000. If you miss out on your allowance one year, you can't make it up later on. When you reach the end of the five-year term you have the option of rolling the capital into an individual savings account.

But beware: most Tessas have a variable interest rate which doesn't work in your favour. When the base rate goes up, the Tessa rate can increase by a small amount; on the other hand, if the base rate drops, the bank or building society will almost certainly cut its Tessa rate below the new base rate. So it is strongly advisable to insist on seeing the interest rate track record of the Tessa you are thinking of buying. It is also advisable to compare actual Tessa maturity values between different providers (see box on left).

There are also fixed-rate Tessas which lock into an interest rate at the outset. Because interest rates have further to fall, Tessas have had something of a resurgence. Also look out for loyalty bonuses and transfer penalties.

Some of the best Tessa rates come from local building societies, but there are conditions and restrictions on some of these accounts. Darlington Building Society pays 7.45 per cent but insists on a minimum investment of pounds 1,000 from people who don't live near Darlington; Staffordshire (7.6 per cent) insists on a minimum investment of pounds 2,500 from non-locals; SAGA (run by Birmingham Midshires) pays 7.5 per cent but is only open to over 50s. You may have to opt for what is on offer from the big players with a national presence.

Alternative low-risk investments

Building society fixed-rate bonds and term accounts offer a fixed rate of interest over a specified term. You know exactly what you are getting but they are not tax-exempt and, of course, if interest rates rise you will not benefit.

There are also various ultra-safe National Savings accounts run by the government. For instance, with the Ordinary Account the minimum investment is a manageable pounds 10 and the maximum is pounds 10,000. Interest is paid yearly. There is no notice required for withdrawal, but the downside is that the interest starts at a paltry 2 per cent. However, the first pounds 70 of annual interest is taken free of tax. The Investment Account offers a more attractive 4.20 per cent interest for pounds 20-pounds 500 and 5.75 per cent for pounds 50,000 and over. Interest is paid yearly gross but is liable to tax and has to be declared.

For up-to-date Tessa rates from Moneyfacts, call 01603 476476.

top tessas

The current top five nationally available variable rates (based on investing pounds 1,000).

Skipton BS 7.40%

Legal & General Bank 7.10%

Principality BS 6.95%

Lambeth BS 6.95%

Yorkshire BS 6.85%

Source: Moneyfacts