Romancing the Tessa

Billions of pounds of maturing tax-free savings have set off an investment price war. Shop around, says Steve Lodge

A NEW year investment price war has been sparked as PEP companies pursue billions of pounds of maturing tax-free Tessa account money. The PEP price cuts come as banks and building societies let rip a flood of follow-up Tessa deals to retain and capture savers. "Basically everybody is after Tessa money," said Graham Bentley of M&G, the biggest PEP company.

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.

Tessa tips

Interest Transfer penalty

rate %

New savers

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

Travel
travel
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
News
Jamie and Emily Pharro discovering their friend's prank
video
Arts and Entertainment
Taylor Swift crawls through the legs of twerking dancers in her 'Shake It Off' music video
musicEarl Sweatshirt thinks so
PROMOTED VIDEO
Arts and Entertainment
Daniel Radcliffe and Zoe Kazan in What If
filmReview: Actor swaps Harry Potter for Cary Grant in What If
News
Our resilience to stress is to a large extent determined by our genes
science
Travel
travel
Arts and Entertainment
tv
Sport
sportBesiktas 0 Arsenal 0: Champions League qualifying first-leg match ends in stalemate in Istanbul
News
Pornography is more accessible - and harder to avoid - than ever
news... but they still admit watching it
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
The eyes have it: Kate Bush
musicKate Bush asks fans not to take photos at London gigs
News
i100
Extras
indybest
Sport
Manchester United are believed to have made a £15m bid for Marcos Rojo
sportWinger Nani returns to Lisbon for a season-long loan as part of deal
News
news
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Junior Database developer (SQL, T-SQL, Excel, SSRS, Crystal rep

£25000 - £30000 per annum + bonus+benefits+package: Harrington Starr: Junior D...

Java/Calypso Developer

£600 - £800 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, ...

Quantitative Developer

£700 per day: Harrington Starr: Quantitative Developer C++, Python, STL, R, PD...

Web developer (C#, MVC4, HTML5, CSS3, Javascript, Jquery)

£30000 - £44000 per annum + Bonus+Benefits+Package: Harrington Starr: Web deve...

Day In a Page

Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment