S&P targets maturing Tessa-holders

SAVE & PROSPER, the savings and investment arm of Robert Fleming, is offering a guaranteed fixed interest rate of 7.5 per cent tax-free to holders of Tessas who agree to roll over their existing holdings when their initial investments start to mature next year.

Significantly, S&P is also offering the 7.5 per cent rate immediately to holders of Tessas with other banks and building societies who agree to transfer to S&P and open new Tessas with S&P/ Robert Fleming when their existing Tessas mature. The offer is open to all Tessa-holders whose accounts mature in the first five months of next year and applies until their accounts mature.

Existing Tessa-holders have always been free to transfer without losing their tax-free privileges, provided they hold accounts for a total of five years. Back in 1991, most Tessa providers offered customers a variety of terminal bonuses and/ or transfer charges to try to discourage them from switching their accounts.

National Westminster, for example, offered a 1 per cent bonus on the first year's balance, payable on maturity, to customers who opened accounts before the end of March 1991. Halifax Building Society, which claims to be the biggest provider of Tessas, with 750,000 accounts, offered a maturity bonus starting at 1.5 per cent of the first year's balance, tapering down to 0.25 per cent of the fifth and final year's balance.

Nationwide Building Society offered an 0.5 per cent bonus to both lump- sum and regular savers, and levies a penalty of 90 days' gross interest for withdrawals.

As there are more than 4 million Tessa accounts containing an estimated pounds 24bn, however, and 98 per cent of all Tessa accounts were actually opened in the first six months of 1991 and mature in 1996, the potential market for transfers is huge.

Apart from competing offers, Tessas will face stiff competition from other instruments, notably tax-free PEPs and the new-fangled Corporate Bond PEPs, which did not exist when Tessas were launched in 1991. Although PEPS and Corporate Bond PEPS do not guarantee to protect capital in the way Tessas do, some Corporate Bond PEPS are offering tax-free yields of up to 9 per cent.

According to S&P market research, 43 per cent of Tessaholders are "definitely" intending to reinvest in new accounts, and 40 per cent will possibly do so, but 17 per cent said they would not reinvest, and 70 per cent said they would shop around for the best rate before re-investing.

Only 26 per cent said they were happy with a variable rate, reflecting the fact that interest rates have fallen with inflation from around 14 per cent in 1991 to about 6 per cent earlier this year. Variable rates have since recovered to 6.5-6.75 per cent, but 50 per cent of holders favour some kind of fixed rate for the future.

S&P's attempt to persuade holders to transfer could be the start of a campaign among all providers to retain existing holders with a fresh range of sweeteners or transfer penalties.

Apart from S&P, Barclays Bank has just announced a new two-year fixed rate of 7.4 per cent, which will apply to existing customers, new customers, and to transfers. After two years it will revert to a variable rate, and takers will be asked to give one month's written notice and accept the loss of 180 days' gross interest at the fixed rate if they withdraw or transfer accounts in the first two years.