Tax-Exempt Special Savings Account: Take a long look before you leap

First-time buyers have a choice of more than 100 Tessas, so it is worth shopping around, says Abigail Montrose

There are three ways to choose a Tessa: pick one at random; simply take the terms available from your own bank or building society; or, and this is the most sensible route, take a little time looking at what is on offer and find a Tessa that suits your particular needs.

There are more than 100 first-time Tessas from which to choose. You can open some with pounds 100 or less but many require a minimum opening balance of up to pounds 3,000.

A few accounts, such as one of Bradford & Bingley's Tessas, require the full pounds 9,000 investment. This money is put in a feeder account and dripped into the Tessa over the five-year period. To encourage investors to deposit the full pounds 9,000 upfront, Bradford & Bingley pays an enhanced rate of 6.25 per cent, compared with 5.55 per cent on its standard tax-exempt account.

Several banks and building societies offer monthly savings schemes for Tessas. Some, such as those run by the Co-operative Bank, First Direct and Midland Bank, start at as little as pounds 10 a month although you need pounds 100 to open the account in the first place.

Tessas pay either a fixed rate or a variable rate of interest. Deciding which type of rate to opt for will depend on whether you think interest rates will go up or down over the next five years.

As Frank Wilson, of TSB, points out: "Our fixed-rate Tessa appeals to customers who are looking for the benefit of a tax-free product coupled with the certainty of a guaranteed return. Our variable-rate Tessa appeals to those who believe interest rates may increase following a general election and into the next millennium."

When interest rates are high, locking in to a high rate is an attractive proposition. But when interest rates are low it is often better to opt for a variable rate, as the rate you lock into may look poor in a few years' time if interest rates rise.

Most first Tessas are of the variable-rate variety, typically offering between 5 per cent and 6.5 per cent. Many of the best-paying are offered by the smaller building societies. For example, Tipton & Coseley Building Society is offering 7 per cent, but this account is available only to local residents. Similarly, West Bromwich Building Society is paying 7 per cent on its Tessa, but a minimum balance of pounds 3,000 is required by those who live outside the Midlands area.

A handful of banks and building societies are offering fixed-rate first Tessas, including Birmingham Midshires Building Society, NatWest Bank, Sun Banking Corporation, TSB and Yorkshire Building Society. Rates typically are higher than the variable rates on offer, at between 7 per cent and 7.5 per cent. But these rates are fixed for the full five-year term. In many cases, a minimum balance of pounds 1,000 or more is required and in some cases the full pounds 9,000 must be paid into a feeder account at the outset.

The advantage of a fixed rate is that you know exactly how much interest your savings will earn. If interest rates should fall, the rates you are locked into will look attractive by comparison.

Often, like mortgages, these fixed-rate Tessas are available only for a limited period.

Demand for fixed-rate second Tessas has prompted several big players, such as Halifax Building Society, to offer them. But these Tessas may be restricted to certain customers, says Celia Rowlands of the Halifax. "Ours is a loyalty scheme for people who had their first Tessa with us and who invested the full amount."

Many people open a Tessa account and deposit money as and when they can afford it. While some have a set rate of interest regardless of the balance in the account, others pay a higher rate of interest on larger balances. For example, you can open an Alliance & Leicester Tessa with as little as pounds 10. Interest starts at 5.5 per cent, rising to 5.6 per cent when the balance reaches pounds 3,000, then 5.8 per cent at pounds 4,800, 5.9 per cent at pounds 6,000 and 6.6 per cent at pounds 9,000 plus.

Birmingham Midshires and Portman Building Society each offer what are known as escalator Tessas. These accounts increase the rate of interest that they pay each year to encourage savers not simply to join but to stay. Portman's account requires a minimum balance of pounds 100 and pays 6 per cent in the first year, 6.25 per cent in year two, 6.5 per cent in year three, 7.25 per cent in year four, and 9 per cent in year five.

Equity-linked Tessas also are available to first-time Tessa holders. The rates of interest paid on these accounts is linked to the performance of the stock market. These are described opposite.

Most Tessas offered by building societies confer membership rights on the holder. In the case of the Halifax, this means that nearly 1 million of its Tessa holders who opened accounts before 1995 are now in line for a windfall of shares when the society converts to a bank this summer - assuming that the members vote in favour of the change to collect the payout.

For details of the best Tessa rates on offer, see the tables on page 17 or consult the regular tables of Best Savings Rates in the Independent on Sunday and Saturday's Independent.