Savers fiddle as interest burns

Societies are admitting to poor Tessa deals, writes Steve Lodge

MANY thousands of savers picking follow-on tax-free Tessa accounts are missing out by not shopping around other building societies and banks, particularly by choosing relatively poor fixed rates on offer from their existing institution.

Halifax building society, with a million accounts making it the most popular Tessa provider, admitted this week that tens of thousands of its savers who so far had rolled over maturing accounts into its fixed-rate Tessa 2 - paying 7 per cent - could have done better switching to another institution. Bradford & Bingley - which claims to be attracting more than its share of Tessa switchers - also conceded that thousands of its existing savers who had chosen its fixed-rate Tessa 2 had missed out.

Many societies and banks are offering special deals and bonuses to savers with maturing Tessas who stick with the same institution for a new Tessa, rather than switching. The Building Societies Association said this week that what it called "substantial incentives" for reinvesting with the same society were leading to most people sticking with their existing society for a Tessa 2. Of more than half a million accounts maturing with building societies in January, two thirds of individuals re- invested with their existing society. But societies also admit that inertia may have played a part in savers rolling over into blatantly worse deals. Even with bonuses, savers may still find a better deal elsewhere.

Fixed-rate Tessa 2s have so far proved popular given fears that savings rates will fall further and given the certainty of return they offer, say societies. Unlike their variable-rate cousins, choosing the best- paying fixed-rate Tessa is less of a gamble. A Halifax spokeswoman said: "If you can get a very good fix you can't really argue."

Existing savers with the Halifax, are currently being offered a Tessa 2 with a fixed-rate of 7 per cent, with a pounds 50 bonus at maturity for already being Halifax savers. But last week that could be bettered by other institutions (see table) - and these top rates themselves have fallen. For example, if savers moved their maturing Tessa to the Yorkshire's 7.3 per cent fixed-rate Tessa, they would earn perhaps pounds 100 more interest over the full five year Tessa term (based on a full pounds 9,000 investment, which both societies require).

One reason why Halifax's savers may have been prepared to tolerate this relatively poor rate is that they fear reducing or losing their eligibility to free shares when the Halifax converts into a bank. But the Halifax has already said it will give savers advance warning of the final date - likely to be early next year - for working out their eligibility. This will be based on a savers' lowest balance on this and past dates. Therefore, people with sufficient other savings to top up their Halifax accounts when required next year would be better off taking a fixed-rate Tessa elsewhere.

Societies and banks have been fighting hard to attract new Tessa savers but many have also heavily mailshotted their existing savers. Bradford & Bingley says it has tried to make it as easy as possible to stay with the society by sending out forms that simply need signing and returning. And few - if any - of the mailshots have offered real advice over and above explaining and recommending their own choice of products.

Here's a guide for making a better choice:

p There are a number of cheap or even free guides to the Tessas available. Johnson Fry publishes a monthly updated Tessa Directory, free on 0171- 451 1200. Independent financial adviser Chase de Vere will send details of the latest highest Tessa rates (including telephone numbers of the institutions) as well as a basic guide to Tessa 2 rules and issues. Again, these are free to savers on 0800 526092. Moneyfacts, which supplied our table, runs a premium-rate fax service of top Tessa rates, which are updated daily. Key in 0336 400238 to your fax machine, then press "start" when indicated. The faxed list will come out on your machine instantly. The service costs 39p a minute cheap rate, 49 a minute at other times.

p If you want a fixed-rate, these services will identify the best available elsewhere to compare with the deal on offer from your own society or bank (don't forget to include any bonuses). But think too about waiting to reinvest - you have six months to roll over all the money up to the full pounds 9,000. Fixed-rate Tessa deals are not based on the general level of interest rates but on the "price" of longer-term money borrowed in the bond market.

Bond market rates have improved recently and Bradford & Bingley, for one, says it may be able to improve its Tessa rate by another 0.25 per cent shortly - which would be worth an additional pounds 100-plus of interest for a pounds 9,000 saver taking out the fixed rate deal at that time. And fixed rates of as much as 8.5 per cent are not inconceivable some time this year - meaning hundreds of pounds of extra interest.

p Fixed-rate Tessa 2s are proving popular, but buyers should consider the possible future direction of savings rates. Fixed-rates may be a little higher than the general level of variable-rate Tessas (although among the very highest, variable rate accounts grab the limelight). But variable rates will change. And while currently they may be set to fall further (if, say, the economy grew strongly), rates could well go higher again, leaving fixed rate deals languishing.

p Fixed-rate Tessa deals tend to carry higher penalties for early closure or transferring. So if you think you might need your money back within the five savings term, or if you want to transfer should your Tessa lose competitiveness, a variable rate deal with low penalties might be a better bet.

p Consider societies that might pay windfalls over the next five years, but that have yet to announce them. Over this period many more societies - particularly the remaining big names - could disappear, even if they preach the virtues of mutuality now.

If, on the other hand, you are already with societies that are handing out free shares you may well feel compelled to roll over with that society to avoid upsetting your eligibility. As said, this should not be an issue with the Halifax (so long as you have sufficient other savings) but savers with the Woolwich and Alliance & Leicester should not expect overly generous rates, while plans remain fuzzy for how many shares people will get.

Highest rates for Tessa 2s

Minimum Rate % Transfer

deposit interest penalty

Yorkshire BS pounds 9,000 7.30F Up to 180 days

Bank of Ireland pounds 500 7.25F pounds 25+30 days

Sun Banking Corp pounds 9,000 7.10F 180 days

West Bromwich BS pounds 3,000 7.10F 180 days

B'ham Midshires BS pounds 1,000 7.05F 180 days

Royal Bk of Scotland pounds 9,000 6.75-9.25F12 30 days

Allied Trust Bank pounds 9,000 6.25-8.75F2 Unspecified

Northern Rock BS pounds 9,000 8.00 pounds 30+

C&G pounds 9,000 7.75 pounds 30

Bath BS pounds 1 7.50 Discretionary

Mercantile BS pounds 1 7.50 pounds 30

Northern Rock BS pounds 3,001 7.50 pounds 30+

Allied Trust Bank pounds 9,000 7.25 pounds 25

Follow-on Tessas in this selection open to all. F - fixed interest

1 - interest not compounded 2 - fixed rates increase over five years. Highest rate only in year five Source: Moneyfacts