Time for a Tessa?

Tax-exempt special savings accounts: they're being replaced in 1999, but these five-year plans still have plenty to offer. Here we look at

TAX-EXEMPT special savings accounts (Tessas) will not shelter your millions from the tax man but they are handy as a modest nest-egg.

Up to pounds 9,000 can be salted away in a Tessa over its five-year life. The Tessa year does not follow the tax or calendar year but starts from the date you open the account.

For new investors, the rules allow up to pounds 3,000 to be invested in a Tessa in year one. Thereafter, pounds 1,800 can be added each year. This means that if you invest the maximum in years one to four, you can only invest pounds 600 in year five.

Aside from the rules about the maximum that can be invested each year, banks, building societies and other Tessa providers often stipulate a minimum investment, typically pounds 1,000 to pounds 3,000. For example, Britannia building society's Platinum Tessa (2nd Issue) demands that the maximum investment be placed in the account each anniversary. However in return, it pays a very good rate, currently, 7.75 per cent.

Some Tessas even ask for the full pounds 9,000 upfront. Money is placed in a "feeder account" and shuttled over to the Tessa each year. Abbey National's Stock Market Tessa is an example of one that uses a feeder account. Returns on this Tessa and the feeder are both reliant on the stock market, with 1.15 per cent gross being added to each balance every month that both the UK's FT-SE 100 Index and America's S&P 500 Index rise.

"The only difference is that returns on the feeder account are taxable but returns on the Tessa are not," says Gug Kyriacou of Abbey National.

Those who have had a Tessa before enjoy slightly more investment freedom than new investors. They can transfer capital from their maturing account into a new Tessa up to the maximum pounds 9,000 if they wish. Any transfer must be made within six months of the old Tessa maturing. If less than pounds 9,000 is transferred, the follow-on Tessa can be topped up with further investments over the five-year term, subject to the usual annual limits.

A number of follow-on Tessas, in particular those paying fixed rate of interest, are only open to investors with the full pounds 9,000 of capital to transfer. These include Halifax, which pays 5.95 per cent fixed a year and a bonus on maturity of 2.5 per cent, and Clydesdale Bank, which pays 8 per cent fixed a year. Interest on the Clydesdale Bank Tessa is paid at the end of the five-year term and promises investors a guaranteed total return of pounds 12,600.

Tessas should enjoy a boom time over the coming year. Although they are being replaced by Individual Savings Accounts (ISAs) in April 1999, any existing Tessas will be allowed to run out the rest of their five-year term. This means investors will be able to shelter up to pounds 9,000 from the tax man until April 2004 if they buy a Tessa at the last minute, and this is in addition to anything they put in their ISA.

On maturity, capital from a Tessa, but not the accumulated interest, will be able to roll over into an ISA - subject to the ISA lifetime limit, currently envisaged to be pounds 50,000 - and continue to attract interest free of tax. ISAs are intended to have a limited cash investment of pounds 1,000 a year but early indications are that investors will be able to maintain the full pounds 9,000 from a Tessa as cash.

A spokeswoman for the Inland Revenue says: "The ISA consultative document states that the method of switching from Tessas will depend on what is practical for investors, providers and the Inland Revenue," which suggests that you would be able to transfer all your capital.

But she adds: "The ISA rules have not been finalised so we cannot [yet] say exactly what the treatment of Tessas will be."

q Contacts: Britannia Building Society, 0800132304; Abbey National, 0800 100801; Halifax, 01422 333333; Clydesdale Bank, 0800 445265.

Take the money and run? Or ignore Bob Hope's advice and put it into a Tessa, available until 1999

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • 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

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence