Tax-Exempt Special Savings Accounts: Four million find true happiness with Tessa

Here and on pages 20 to 21 we look at a pounds 27bn scheme

There is no need to hide your money in the Cayman Islands or pay clever accountants to dream up new tax dodges. For a simple tax break, just take a walk down the high street and ask for a Tax-exempt Special Savings Account. Simply hand over the cash and walk away, then come back five years later and collect the interest tax-free.

As more than 4 million people already know, a Tessa is one of the easiest and simplest tax-savers around, and over the past six years they have attracted a staggering pounds 27bn.

If you were introduced to Tessas back in 1991, when the accounts first began, you could well have seen a total investment of pounds 9,000 build up to around pounds 12,000 with all the interest free of tax. The big attraction of a Tessa is that it is a risk-free tax-saver. This is the key point of distinction between a Tessa and a personal equity plan or Pep.

Tessas are simply a form of savings accoun. Even if stock brokers are leaping out of Wall Street windows, with a Tessa you will always get back at least the money you invested. Keep your money in the account for a full five years and it is entirely tax free, a rule intended to encourage long-term saving.

Peps, on the other hand, are essentially investments in the stock market, either directly, with shares bought through a broker, or through a fund manager such as unit or investment trusts. If stock markets crash, you may not get back all the money you invested, but if they do well, you could make a killing.

Like other savings accounts, a Tessa pays interest, which can be fixed or variable. With a fixed rate, you can work out in advance how your capital will grow over the five-year term, which can be helpful if you are trying to reach a specific target.

On the other hand, if you think that interest rates will generally follow an upward trend for most of the next four or five years, you could opt for a variable rate account, on which the interest will change from time to time in line with savings rates.

Many people are passive investors; many open a Tessa and either pay in a lump sum or set up a direct debit for regular transfers and then forget about it all until the account matures in five years' time.

If, on the other hand, you take a more active interest in managing your finances, you should find out before opening the account what it would cost subsequently to transfer your account to any other provider offering better rates.

Transfers are permissible but often there is a fee if you transfer out of your Tessa before it matures, and this can be anything from pounds 10 to pounds 50, or even more in some circumstances. You may also be required to give up to 60 days' notice if you plan to leave or close your account, and there will probably be no interest paid on your Tessa balance during this period.

Before you try to transfer your Tessa to a new provider, you should check the new bank or building society allows transfers into its Tessas, as many do not.

Most banks and building societies offer at least two types of Tessas, one for first-time savers and the other for those who are looking to reinvest the proceeds from their first Tessa account, and there are different investment limits for each.