Romancing the Tessa
Billions of pounds of maturing tax-free savings have set off an investment price war. Shop around, says Steve Lodge
Sunday 07 January 1996
The US-owned company Fidelity and Legal & General crossed swords last week to offer the lowest-cost stock market PEP, in moves described by one competitor as "loss leaders". And more low-cost PEP deals are expected: "It's continuing - the price war is not abating in any way," says Sean Kingston of the financial adviser Hargreaves Lansdown. Direct Line, the telephone-based seller, for example, is planning to launch a low-cost PEP which one competitor suggested could offer guarantees for savers.
PEPs and Tessas both offer tax-free returns, but PEPs, as stock market investments that can lose as well as make money, are more risky and have proved less popular than Tessas, where your money is always secure.
With PEP allowances running on a tax-year basis, the new year is the traditional time for PEP companies to bump up their promotions. But their sales efforts are being given an added incentive this year by the maturity of the first Tessas, which must be held for five years to earn tax-free interest. More than 2 million people will each unlock up to pounds 14,000 from maturing Tessas over the next three months.
Savers can roll over any money they put into their first Tessas into a new Tessa, and for many that will be an attractive option. But the interest earned, up to pounds 5,000 but typically pounds 2,000, cannot be reinvested in a Tessa. It is this interest element PEP companies are particularly hoping to appeal to.
Fidelity fired the first salvo in the price war last week, undercutting low-cost stock market PEPs. Legal & General responded by halving the price of its existing UK Index Tracking PEP, reaffirming its position as offering the lowest-cost stock market PEP around and offering a refund of one year's charges for savers taking out a PEP for the next tax year as well.
Both companies offer straightforward PEPs which aim to track the performance of the stock market but which should still perform well against rivals that try to use claimed investment expertise to beat the market.
With stock market-tracking PEPs, charges are a key determinant of which performs best. The cheapest, from L&G, now makes a simple charge of 0.5 per cent a year of the value of a PEP investment. Fidelity makes a similar annual charge, but investors also bear a one-off cost of 0.7 per cent for the difference between buying and selling the underlying shares. Many traditional stock market PEPs charge triple that or more overall.
Banks and building societies are keen also to keep as much maturing Tessa money as possible. While savings rates generally are being pared away to pay for the mortgage cuts announced late last year, new Tessas are being launched with rates as high as 8 per cent. Some existing Tessa savers are being offered special deals if they roll over into a Tessa 2 from the same institution.
But identifying the best available Tessa 2 is "an absolute nightmare", according to MoneyFacts. Simply looking at the quoted interest rate is not enough - there are many complications and the Tessa that produces the best returns will be known only with hindsight.
Johnson Fry, an independent financial adviser, has put together a free guide to the new Tessas, which readers can get by phoning 0171-451 1000. The guide, which will be updated monthly, lists the terms and conditions of the various Tessas which can increase or decrease the attractions of a particular headline interest rate. Our table shows Johnson Fry's best buy tips for savers taking out Tessas for the first time and for people rolling over their existing Tessas into Tessa 2s.
Here are some tips for picking the best Tessa for you:
o Different Tessas will suit different people. Some will offer the option of paying out the income, some will offer guaranteed interest rates and some will pay returns partly related to the performance of the stock market. Johnson Fry's picks are for people wanting growth, rather than having the income paid out.
o Look behind high headline rates. The rate may be lower for lower balances, or only available for part of the savings term. And remember high rates on variable-rate Tessas may not last. By comparison, a lower quoted rate may produce a higher overall return because of extra interest bonuses.
o Watch out for penalties. Some of the Tessas quoting the most attractive rates have high penalties if you should need to get your money back during the five-year term or if you should want to transfer to another Tessa provider. Johnson Fry favours Tessas with low penalties, on the principle that "that rainy day may happen early". But savers who are sure they can stay the distance may do better elsewhere.
o Shop around. You do not have to reinvest maturing Tessa money with your building society or bank. Ask your Tessa provider for a maturity certificate. This will allow you to roll over more than pounds 3,000 of capital into a Tessa 2 offered by a different society or bank.
o Don't be rushed. You don't have to immediately reinvest Tessa proceeds. You have six months to take advantage of the concession to roll over all your original Tessa capital.
Interest Transfer penalty
Coventry BS 6.8 7 days' notice
Dunfermline BS 7.2 None
Furness BS 6.7* None
Halifax BS 5.9* pounds 10
Hanley Economic BS 6.75 7 days' notice
Tessa 2 savers
Abbey National** 7.0* (fixed) pounds 20
Market Harborough BS 6.75 None
Hanley Economic BS 6.75 7 days' notice
Coventry BS 6.8 7 days' notice
Loughborough BS 7.0* None
Tips chosen by Johnson Fry, publisher of free Tessa Directory (0171- 451 1000). Tips assume saver is looking for growth rather than income and low penalties for transferring or closing. Tips are not necessarily the highest rates available. Rates variable unless stated otherwise.
* Potential interest rate bonus when Tessa matures
** Only available to savers rolling over pounds 9,000
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