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%

PROMOTED VIDEO
Arts and Entertainment
glastonbury
News
i100
Arts and Entertainment
Shock of the news: Jake Gyllenhaal in ‘Nightcrawler’
filmReview: Gyllenhaal, in one of his finest performances, is funny, engaging and sinister all at once
Life and Style
Taste the difference: Nell Frizzell tucks into a fry-up in Jesse's cafe in east London
food + drinkHow a bike accident left one woman living in a distorted world in which spices smell of old socks and muesli tastes like pork fat
Arts and Entertainment
Kit Harington has been given a huge pay rise to extend his contract as Jon Snow in Game of Thrones
tv
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Don’t send in the clowns: masks and make-up conceal true facial expressions, thwarting our instinct to read people’s minds through their faces, as seen in ‘It’
filmThis Halloween, we ask what makes Ouija boards, demon dolls, and evil clowns so frightening?
News
peopleFarage challenges 'liberally biased' comedians to 'call him a narcissist'
Arts and Entertainment
Liam and Zayn of One Direction play with a chimpanzee on the set of their new video for 'Steal My Girl'
music
Arts and Entertainment
Young Fathers are the surprise winners of this year's Mercury Music Prize
music
News
i100
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

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Market Risk Manager - Investment Banking - Mandarin Speaker

£45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Day In a Page

The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes
Independent writers remember their Saturday jobs:

Independent writers remember their Saturday jobs

"I have never regarded anything I have done in "the media" as a proper job"