Watch your investment escalate
The underlying rules, however, have not changed since Tessas were launched more than seven years ago. The maximum investment is still pounds 9,000 over five years. You can only withdraw net interest if all of your income is to remain tax free.
By far the most simple and popular type of Tessa remains the variable- rate variety. With this Tessa the rate of interest you are paid can change at any time, depending on prevailing rates. Currently, a variable-rate Tessa pays anywhere between 6 and 8 per cent per annum, depending on the provider.
Smaller, provincial building societies tend to offer the best rates. For instance, Melton Mowbray building society is offering 7.9 per cent per annum.
Some people make their Tessa investments with an eye open for possible windfall payments. As one independent financial adviser says: "I tend to go for the small, mutual building societies because they have to be more competitive and, also, you never know what might happen in the future."
The headline rate of interest on offer, however, does not always tell the whole story. Some banks and building societies offer escalator Tessas. These pay a higher rate of interest the longer you stick with the account and the more money you put in. One of the most popular escalator Tessas is the Abbey National's. It begins with a 6.7 per cent return in the first year rising to 7.65 in year five if the full pounds 9,000 has been invested.
Another choice for the investor is a "guaranteed" Tessa. Birmingham Midshires, for example, promises to pay at least 3 per cent above the rate of inflation, thereby guaranteeing your money grows in real terms.
Another option is the fixed-rate Tessa. These guarantee a particular rate of interest over the full five years. Current fixed-rate deals range from 7.7 to 7.45 per cent a year. These are appropriate for any investor who believes that interest rates are likely to fall in the longer term, which is by no means a certainty.
Another type of account has also become more popular - the stock market- linked Tessa. This spices up your investment by linking the rate of return to the performance of the stock market. The main providers include Abbey National, Bristol & West and HSBC.
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