Tessa's troubles

ISAs are surging ahead in the interest rate tables, writes Faith Glasgow

Thousands of us succumbed to the riot of advertising and opened a tax-exempt special savings account (Tessa) before they shut for new business in April. If you were one of these canny savers, you no doubt congratulated yourself on a neatly timed investment - five years of competitive interest rates, and tax-free to boot.

If you had pounds 3,000 to save, you probably looked hard at Skipton Building Society's chart-topping 7.4 per cent (as of 1 March). Many other accounts were paying around 6.5 to 7 per cent.

If you have followed the movement on rates since then, you have probably been disappointed. A recent survey of 30 top Tessa providers carried out by independent statistics provider Moneyfacts shows most of those enticing interest rates now lag behind their new ISA (individual savings account) counterparts.

Moneyfacts found 27 of the 30 institutions are paying less on Tessas - by as much as 2.35 per cent.

Philip Telford at the Consumers' Association says: "Banks and building societies are following a classic ploy - counting on the inertia of most account holders to suffer in silence or simply not to notice as the headline rates of that account are allowed gradually to lapse once it's become obsolete. It's not illegal, but it's not exactly fair play."

But if you decide to transfer to another provider with better rates there are often punitive penalties.

Adrian Korsner from London took out a follow-on Tessa with Northern Rock about three years ago when it was paying 7.5 per cent, one of the best rates at the time. He recently received notification that his account is now paying 4.5 per cent. He phoned to find out whether he could transfer into one of the other Northern Rock Tessas (both paying better rates) but was told he could not because they are fixed-rate products. If he transferred to another provider he would be charged pounds 30.

"I think it's a deplorable situation to lock me into such a low-interest account, when Tessas were sold on the premise of earning more interest by not paying tax," he said.

Northern Rock defended its position saying: "It's important that investors look at the overall return over the whole investment period." It points out the 4.5 per cent rate now applies to the first three years of the Tessa. In year four it rises to 5.85 and in year five to 6.1 per cent. Still, that now averages out at 5.03 per cent a year over the five-year term; by contrast, the Rock's cash ISA is paying 5.75 per cent.

Moreover, if your Tessa is paying less than 4.8 per cent - there are six included in the Moneyfacts survey - you would actually be better off paying tax on your savings within a top-paying no-notice account.

In this context, Northern Rock said that if Mr Korsner was prepared to sacrifice his tax-free status, he could switch, free of charge, into their Base Rate Tracker, that is currently paying 6 per cent (which amounts to 4.8 per cent gross).

Why the differential between Tessa and ISA rates? "They are different types of products with different terms and conditions," a Northern Rock spokesman said. But there's nothing so very different from the point of view of the average consumer. Surely it's the same type of low-risk, high- interest tax-free deposit account, albeit with different investment parameters? (You can only put pounds 1,000 per year into a cash ISA after this first year when the limit is pounds 3,000; you can hold your ISA indefinitely rather than for a maximum of five years.)

Even if you are not penalised too severely for taking your savings out of a Tessa, don't expect to be able to slot it into the highest paying alternative. Many Tessas paying acceptable rates of around 6 per cent do not accept transferred accounts. The Ipswich BS is one of the few places that does welcome Tessa transfers.

n Contacts: Coventry BS, 0845-766 5522; First Direct, 0800 242424; Furness BS, 0800 220568; Ipswich BS, 01473 211021; Julian Hodge Bank, 01222 220800; HSBC, 0800 180180; Norwich & Peterborough BS, 0800 883322.

SHOULD I MOVE MY ACCOUNT?

Hassle: is the rate really that bad? Although many providers are paying Tessa rates below their ISA rates, the odd half percentage point may not be worth worrying about, even if you can switch without penalties.

Newness: is your account a recent one? Those who leapt in over the past few months of the tax year face five years of dwindling returns as providers focus their attention on accounts where they can attract new business. They might be better off transferring either to a more attractive Tessa (see box below for top rates accepting transfers) or to a taxable account.

Maturity: are the five years nearly up? If so, it's probably worth hanging on until the term is up and then rolling it over into a Tessa- only ISA. These are paying very competitive rates.

How much is the penalty? Some charge only a few days' or a week's interest, which doesn't amount to much. By comparison, if you lose 180 days' interest at 5.75 per cent on pounds 3,000, it will cost you pounds 86. Birmingham Midshires has a firm grip on its savers.

FLEXIBLE DEALS

A selection of providers offering good rates and accepting transfers

First and follow-on Tessas

First Direct 6%

Furness BS 6.1%

Julian Hodge Bank 6.25%

HSBC 6%

Norwich & Peterborough

BS (first Tessas only) 6.25%

Start your day with The Independent, sign up for daily news emails
Voices
Ed Miliband and David Cameron are neck and neck in the polls
election 2015Armando Iannucci: on how British politics is broken
News
i100
Life and Style
Great minds like Einstein don't think alike
tech
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
health
News
science
ebooks
ebooksA celebration of British elections
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
News
Chuck Norris pictured in 1996
people
Arts and Entertainment
Sarah Lucas, I SCREAM DADDIO, Installation View, British Pavilion 2015
artWhy Sarah Lucas is the perfect choice to represent British art at the Venice Biennale
News
A voter placing a ballot paper in the box at a polling station
i100
News
people
  • Get to the point
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

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Ashdown Group: Marketing Executive - 6 month FTC - Central London

£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

Ashdown Group: Junior Project Manager (website, web application) - Agile

£215 per day: Ashdown Group: Junior Project Manager (website, web application ...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power