Personal Finance: Last orders for Tessas

Hurry! There are just four months left to take advantage of Tax Exempt Special Savings

IN THE next four months you'll hear a lot about Tessa deadlines. That's because we're approaching your last ever chance to invest in one of the Tax Exempt Special Savings Accounts, to give them their full title. It is a chance you should seriously consider taking, as Tessas offer security and tax advantages unavailable through similar tax-free schemes such as PEPs.

In essence, a Tessa is a deposit account, but one with a major advantage over other deposit accounts offered by banks and building societies: you pay no tax on the interest as long as you keep the Tessa for five years. That is a powerful motivator and, with some accounts paying more than 8 per cent at present, they're looking highly attractive.

Tessas are being withdrawn at the end of the tax year and being replaced by the new Individual Savings Accounts. In the ISA you can save only pounds 1,000 in cash each year (pounds 3,000 in the first year). But clever savers will have spotted the Government's agreement to allow existing Tessas to continue until maturity.

That means any Tessas started before the deadline will continue through their full five-year term, despite the introduction of ISAs. It means you'll have an extra allowance of tax-free savings for up to five years after the introduction of ISAs, but only if you act before 5 April 1999.

Finding the right Tessa can prove difficult. With more than 250 to choose from, sifting through them all can seem fairly arduous. But investors wanting to maximise returns should at least do some homework.

Finding the best-paying Tessa may seem easy but bear in mind that rates change, so today's winner could well be tomorrow's second-rater. At present Tessa rates are looking pretty generous and there are a number paying 8 per cent or more. But rather than looking purely at rates, you should first decide which type of Tessa you prefer. Do you want a fixed-rate, variable-rate, equity-linked or escalator Tessa?

With experts predicting a fall in interest rates should Britain join the EMU, a fixed rate Tessa begins to look attractive. Locking returns into 6.5 per cent or so for five years may seem unwise in the short term when variable rates of 8 per cent or more are available, but will have seemed a wise move if rates plummet.

Abbey National and Sun Bank are currently offering fixed rates for new Tessas at 6.5 per cent while a number of suppliers are offering fixed- rate follow-on Tessas, including the Halifax at 5.55 per cent and Norwich & Peterborough at 6.15 per cent.

The Royal Bank of Scotland and Investec Bank are the only two companies currently offering escalator Tessas and on to follow-ons. Rates start at around 6 per cent and rise to around 9 per cent by year five, but most companies have withdrawn their escalators ahead of expected interest rate drops.

Equity-linked Tessas are aimed at those who want to tap into the perceived potential of the stock market, but these are a risk. In general they promise a percentage of the growth of an index such as the Footsie, over five years. Birmingham Midshires, for instance, offers 70 per cent of the growth of the Footsie, or 10 per cent. The danger is that, if the Footsie fails to perform, you could be left with a Tessa paying much lower than a simple variable rate Tessa chugging along at 8 per cent or so a year, or a fixed rate at 6.5 per cent.

Once you have decided which kind of Tessa you want, it is worth looking at which companies are offering the best rates. Also check the terms and conditions, and penalties. Check that you can have interest when you want it, for instance, or that you can meet the minimum investment required. An equity-linked Tessa, for instance, requires a minimum opening balance of pounds 3,000 - and many require the full pounds 9,000 up front.

If you've already got a Tessa it's quite simple to switch Tessa supplier. You are allowed to transfer cash from one Tessa into another without it counting as a closure. But watch out for transfer penalties which could be anything up to a loss of 180 days interest.

Additionally, switching could mean losing out on any loyalty bonus your Tessa provider would have paid had you stayed the full term with them. It is also worth bearing in mind that not all Tessa providers allow transfers into their schemes. Before you make any decision to transfer for a better rate, check all these to ensure the switch will be worthwhile.

The Tessa

Rules

You must be 18 to hold a Tessa. You can only hold one Tessa at any one time. A Tessa must be held for the full five-year period to get the tax benefits.

You are allowed to transfer between Tessas from different companies, but doing so may incur a charge.

You can invest up to pounds 9,000 in total in a Tessa - pounds 3,000 in the first year and up to pounds 1,800 in subsequent years.

Cash from a maturing Tessa can be reinvested in a new one.

You only have until the end of this tax year - 5 April 1999 - to start a new Tessa or a follow-up Tessa.