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

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones