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

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

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Barn owls are among species that could be affected
charity appeal
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas