A life without Tessa

By STEPHEN WOMACK
Updated:

 

Decision day beckons for Peter Johnson, one of an army of Tessa holders who must decide what to do with their tax-free savings during 2001. His Tessa matures in February after five years and he cannot open a new one, so along with other holders of maturing Tessas must find a new home for his money.

Thousands of Tessa accounts will mature in the next few months. It is 10 years since these tax-free savings accounts were launched, in January 1991.

Savers rushed to open the accounts, putting their money out of reach of the taxman. When the first accounts matured five years ago much of the cash was rolled over into follow-on Tessas for another five-year term.

Peter, 52, from Newbury, Berkshire, will have a range of options. He could invest the capital he paid into the Tessa, up to £9,000, in a Tessa-only Isa (also known as a Toisa). This would enable him to keep saving free of income and capital gains tax. And, crucially, it does not count towards his annual £7,000 Isa allowances. There is a deadline of six months after the Tessa matures to make this investment.

Though some Tessa savers may have taken interest from their account, many others let interest accumulate. On the best- performing accounts, the interest could amount to almost £5,000. Savers must also consider what to do with this money.

For those wanting a straightforward deposit account, there are deals designed to tempt Tessa money. Portman building society pays 7.3% variable rate interest on its new Tessa-only Isa account, though 45 days' notice is needed to withdraw cash. Yorkshire building society offers a fixed-rate Tessa-only Isa that pays 6.2% until 2004.

NDF's Extra Income & Growth Plan 5 is an Isa delivering a guaranteed 10.05% growth a year for three years. The original capital is safe unless the Eurostoxx 50 index falls by more than 15% between February 21, 2001 and April 7, 2004.

For savers who are willing to tie up their cash for longer HSBC's new range of equity-linked Isas run for five years. The capital is safe, but the interest depends on how well the FTSE 100 index performs in the next five years. At best, savers could earn 60%. Zero interest is the worst scenario.

Most watched Money videos