Tax Planning: No need to mourn for Tessa

New tax-exempt savings accounts - ISAs - will be more flexible, writes Stephen Pritchard

With interest rates firmly on a downward curve, it becomes especially important to protect what little growth there is from the Inland Revenue.

For almost a decade, the main way to keep all the interest you earn on savings has been the Tessa, or tax-exempt special savings account. Tessas reward savers with generous, tax-free interest. The scheme's rules are widely regarded as inflexible and Tessas will be replaced this April by the cash element of the individual savings account (ISA).

The main drawback of Tessas is their five-year term. Although it is possible to withdraw money before then, doing so removes the account's tax-free status. The only exception is net interest, which savers can withdraw without penalty.

"The main difference between the Tessa and the ISA is access," explains John Warburton, investment product manager at Halifax Financial Services.

"One of the main impediments to people saving with Tessas was the perception that any savings were tied up for five years. With ISAs, savers can take their money out without penalties."

Anyone who does not already have a Tessa can open an account and deposit up to pounds 3,000 between now and April. Skipton BS is paying 7.4 per cent interest on its Tessa but you have to pay in the full pounds 3,000. The Portman is paying 7 per cent on pounds 1,000 upwards by post and pounds 100 if you live near a Portman branch (mainly in the South and South-east).

Tessas are independent of any other tax-free investments, such as PEPs, so a Tessa could be a valuable option for someone who has already used up his or her other allowances. Higher-rate tax payers will benefit most of all.

From April, cash-based ISAs will play much the same role as Tessas do now. However, there will be some important differences. ISAs are multi- purpose accounts that can hold cash, investments such as unit trusts or shares, or insurance policies.

ISAs should be more flexible, as there is no standard fixed term. Banks and building societies will be able to offer both notice and instant-access accounts under the cash ISA rules, but this is likely to be at the expense of lower interest rates. One reason Tessa interest rates are attractive is that they are long-term savings accounts.

"There is no specified minimum holding, but we can't expect to see the same interest rates on ISAs as we do on Tessas," suggests Paul Freeman, senior manager, personal financial planning, at accountants PricewaterhouseCoopers.

"Tessas pay well because the money is tied up for five years. With ISAs, the rate will depend on how long you are prepared to tie up your money," Mr Freeman added.

Some banks and building societies have already announced the opening rates for their ISA accounts. Abbey National, for example, will pay 6 per cent on amounts up to pounds 999 and the bank will not drop rates below base rate until July 2000. In the first year, savers can put pounds 3,000 in cash into an ISA. From 2000, the limit falls to pounds 1,000. Savers whose Tessas mature will be able to put the capital into a new, Tessa-only ISA; this does not need to be with their existing Tessa provider. The Tessa-only ISA is a separate, tax-free savings account and does not affect the other ISA allowances. This means that savers who want to maximise their tax- free cash and who are able to tie up their money, can boost their holdings by taking out or topping up a Tessa now and converting it to a Tessa ISA when the five-year term finishes.

The main alternative tax-free savings products come from National Savings. National Savings certificates are sold either with fixed interest or index- linked, with a fixed margin over inflation: currently, the rate is inflation plus 1.65 per cent. National Savings is an extremely safe home for money and for higher-rate tax payers the tax-exempt status of investment certificates can look particularly attractive. The disadvantage is that the certificates are sold for a fixed period and the interest is added to the capital, so they are not suitable for savers looking for an income.

Savers who are willing to speculate but still protect their capital do have some other options. One is to put the money into a building society in the hope that it will convert to a bank and distribute windfall shares. The windfall goldrush may well be over, though, with only a few large societies still mutual. Many building societies have placed restrictions on windfall payments. For savers who already have money in a mutual building society, or who can find one that allows them to open an account, there is a large incentive as windfall benefits are tax free.

Winnings from Premium Bonds and the National Lottery are tax free, too, but the lottery at least hardly qualifies as a safe investment.

"Premium Bonds are quite interesting," suggests Paul Freeman at PricewaterhouseCoopers. "You do get your stake back and the winnings are tax free. Provided you are prepared to take a risk, there is a chance of a good tax-free return."

n National Savings can be reached on the internet at www.nationalsavings.org.uk or 0645 645 000. Portman BS: 0800 807080; Skipton BS: 0800 446776.

n Information on ISAs is available from Chase De Vere on 0800 985 9000.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths surrounding the enigmatic singer
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
Life and Style
life
ebooks
ebooksA special investigation by Andy McSmith
Sport
Christian Benteke of Aston Villa celebrates scoring the winner for Aston Villa
football
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
News
Bill O'Reilly attends The Hollywood Reporter 35 Most Powerful People In Media Celebration at The Four Seasons Restaurant on April 16, 2014 in New York City
media It is the second time he and the channel have clarified statements
News
people
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

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn