Savings that really perform

savings plans

ONE OF the main attractions of PEPs is that they are completely tax free - there is no tax on capital gains, and the tax credit on dividends can be reclaimed. But they are far from being the only tax-free investment. While no-one should pick an investment simply because it has tax advantages, freedom from tax can change a good investment into a great performer.

One of the more recent arrivals is the Tax Exempt Special Savings Account, or TESSA. Announced by John Major in his one and only budget as Chancellor of the Exchequer in 1990, they first became available in January 1991.

A TESSA is a building society or bank account on which interest can be paid tax free. The total amount that can be invested into it is £9,000, with a limit of £3,000 in the first year and up to £1,800 a year in the next four years. The account matures after five years, and the capital and interest can be withdrawn.

Before maturity, only the net interest can be withdrawn. If more is taken out, the TESSA has to be closed and the interest accrued so far all becomes chargeable to tax immediately.

TESSAs appeal to the less adventurous who are wary of the ups and downs of stock market investment through a PEP. For those who want not only security of their capital and freedom from tax, but who also want to know what return they are going to get on their investment, National Savings Certificates are the answer. They offer a fixed, tax-free return after five years investment. The rates vary with each new issue; the current issue is the 42nd and the rate of interest is 5.8 per cent per annum. But beware - that rate will only apply if you hold the certificates for the full term. Cash them in earlier and the rate drops.

Many investors believe that all National Savings investments are tax free. This is not so, as taxpayers often find to their cost. This is particularly true of the National Savings Investment Account. It pays interest gross, but taxpayers have to declare the income to the Inland Revenue.

However, one National Savings investment which is tax free, and which combines security of capital with the National Lottery, is the much maligned premium bond. Although the prize money received by any one investor can never be guaranteed, the total amount distributed each year is 5.2 per cent of the value of the bonds in issue. That is a good rate of return for a higher rate taxpayer, and provided he or she holds a few thousand pounds in bonds, the large number of small prizes should result in an income.

For the small but regular saver, friendly societies have always offered a tax-free return on a ten year life endowment policy. However in the past the limit on the premiums, which they can take has meant the administration costs have often swallowed up much of this benefit.

Steady increases in the permissible premiums over the past five years, from £100 in 1990 to £270 once the latest Finance Act is passed, mean that this is no longer the case. The new limit means that, if a husband and wife each take out a policy, together they can save a total of £45 a month in a tax-free savings plan.

This is likely to give a better return than an equivalent policy with a life assurance company, since when an ordinary endowment matures, the life assurance company has had to pay tax on the profits and gains it has made.

But the most tax efficient investment is one which most people do not think of as an investment at all - contributing to a pension fund. Unless they are in one of the best company pension schemes and intend to remain with the same employer for forty years, most people will not receive the maximum pension which they are entitled to under Inland Revenue rules.

Workers who are in a company scheme can increase their pension by saving through additional voluntary contributions. Those who are not in a company scheme, or who are self-employed, can contribute to a personal pension plan.

In either case there is a double tax advantage. First, the premiums attract tax relief provided they are within Inland Revenue limits, and second its tax free.

Contributing more to your pension scheme may not be a particularly novel form of investment, but it has the best tax treatment on offer.

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

Guru Careers: Financial Controller

£45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Recruitment Genius: Sales Adviser - OTE £24,500

£22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...

Recruitment Genius: Business Development Executive / Sales - OTE £40,000

£18000 - £40000 per annum: Recruitment Genius: This fast growing Insurance Bro...

Day In a Page

Mullah Omar, creator of the Taliban, is dead... for the fourth time

Mullah Omar, creator of the Taliban, is dead... again

I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

Margaret Attwood on climate change

The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

New Dr Seuss manuscript discovered

What Pet Should I Get? goes on sale this week
Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

The cartoon hedgehog leading the way into a whole new reality

Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
Ants have unique ability to switch between individual and collective action, says study

Secrets of ants' teamwork revealed

The insects have an almost unique ability to switch between individual and collective action
Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

Donovan marks his 50th year in folk

The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

Simulator recreates thrill of F1 circuit

Rory Buckeridge gets behind the wheel and explains how it works
Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

Twitter accused of 'Facebookisation'

Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

Jane Birkin asks Hermès to rename bag

The star was shocked by a Peta investigation into the exotic skins trade
10 best waterproof mascaras

Whatever the weather: 10 best waterproof mascaras

We found lash-enhancing beauties that won’t budge no matter what you throw at them
Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

Diego Costa: I go to war. You come with me...

Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
Ashes 2015: England show the mettle to strike back hard in third Test

England show the mettle to strike back hard in third Test

The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

Charley Hull: 'I know I'm a good golfer but I'm also just a person'

British teen keeps her feet on ground ahead of Women's Open
Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

Our choice is years of Tory rule under Corbyn or a return to a Labour government

Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'