TESSA

Tax-Exempt Special Savings Accounts, or TESSAs, were five-year savings accounts which enabled you to receive interest gross - without the deduction of any tax. Since 5 April 1999, it has not been possible to start a new TESSA. However TESSAs in existence at that date were allowed to continue to run to maturity under normal TESSA rules. This meant that investors could continue putting money into a TESSA, up to the annual TESSA limits, even if they had an ISA as well. The last TESSAs, therefore, matured on 5 April 2004.

On maturity, the capital saved in a TESSA, up to £9,000, could have been invested into the cash component of an ISA on top of normal annual ISA limits. A six-month window of opportunity to do this existed. Thus TESSA investors were able to reinvest their mature TESSA capital, but not the accrued interest, at any time up until 5 October 2004 without loss of the tax exempt status and without impacting on their annual ISA allowance. Accrued interest from a TESSA could also be invested into an ISA but only within the normal annual investment limits.

Launched in January 1991, TESSAs were available until 5 April 1999 when they were replaced by the new Individual Savings Account ( ISA ). You could invest up to £3000 in the first year and up to £1800 in each of the subsequent four years, to a maximum of £9000. All interest on a TESSA was free of income tax, provided no capital and not more than 75 per cent of the interest was withdrawn until the end of the 5 year term.

TESSAs were meant to be easily transferable, so investors could compare rates of interest from different institutions and move to the one offering the best returns. The hope was that institutions would compete to offer the highest rates. But the banks and building societies introduced a confusing array of loyalty bonuses and transfer penalties to make rate comparisons difficult and to dissuade customers from moving.

See Also: Moneyextra's ISA supplement Stockmarket Centre

Last Updated: May 2008 © Moneyextra.com

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