Billions of pounds worth of Tessa money is set to mature this year as the popular tax-free savings p...
Billions of pounds worth of Tessa money is set to mature this year as the popular tax-free savings plans reach their tenth birthday. Millions of savers will be reaping the benefits. The Inland Revenue estimates that out of a Tessa market worth around £30bn, £21bn is expected to reach maturity in 2001, more than two-thirds of it before the end of April.
Tessas are maturing all the time, but the beginning of this year is special. The first savers who signed up in early 1991 will be coming to the end of their second five-year term, and those who rolled over the maximum £9,000 into a follow-on Tessa five years ago can expect to scoop around £12,000 to £16,000.
Some may treat the money as a windfall and use it to upgrade the family car, take a luxury holiday or make those much-needed home improvements. But, if history is anything to go by, most people with maturing Tessas will be looking to reinvest their money, preferably in tax-free savings plans.
Picking the best account at the time was not easy, as the gap of £4,000 between the best and worst Tessas maturing now shows. Depending on the decision they made five years ago, Tessa savers could have seen anything from 34% to 77% growth on their capital.
The rules on reinvesting Tessa capital are different this time around. The interest still has to be withdrawn, but capital can be rolled over into a Toisa (Tessa Only Isa) rather than another Tessa. A Toisa is a special type of Isa, set up to take capital from Tessas maturing after 6 April 1999, the date on which Isas replaced Peps and Tessas.
Some things don't change, however. Now, as five years ago, there are more than 100 different products to choose from and three main types variable rate, fixed rate and stock market linked.
Isas allow you to invest up to £7,000 a year. You can hold up to £3,000 in cash, usually bank or building society deposit accounts, up to £7,000 in stocks and shares, either individually or held in funds like a unit trust, and up to £1,000 in insurance, essentially with-profits bonds. These can be held either as a single maxi Isa with one company, or up to three mini Isas with different firms.
Maturing Tessa capital can be rolled over into either a cash mini Isa the cash component of a maxi Isa or a Toisa. The limit is whatever you originally saved into your Tessa.
Up to £9,000 Tessa capital can be rolled over without losing your £7,000 tax-free Isa allowance. The Toisa allowance and the option to roll Tessa money into a cash mini or maxi Isa is in addition to mini or maxi Isa allowances.
If you want to take advantage of the maximum stocks and shares allowance, however, you should avoid putting Tessa money into a cash mini Isa. Instead, you can roll up to £9,000 Tessa capital into a Toisa and take out a maxi Isa. This can hold up to £3,000 in cash, up to £1,000 in insurance, and the rest potentially up to the full £7,000 if you aren't interested in cash or insurance in stocks and shares. Most banks and building societies offer Toisas, with only a few sticking to cash Isas.
If you do choose a cash mini as the home for your maturing Tessa money, you can put in another £3,000 on top. You can then put up to £1,000 in an insurance mini and up to £3,000 in a stocks and shares mini. The interest you have earned on your Tessa cannot be rolled into a Tessa Isa, but you can put it into an ordinary Isa.
Depending on how much interest you've received, and how much risk you want to take, you could stick to cash, take a bit more of a gamble with insurance or stocks and shares, or spread it between the three.
It is a good idea to shop around for a Tessa manager as rates can vary significantly, currently from about 5.5% to 7.3% on variable rate Toisas and cash Isas. There are also fixed rate deals and some stock market linked accounts to choose from.
Over the past five years, stock market linked accounts have provided the best returns for Tessa customers, although they are not for everyone. If you do want to stay with your current manager, simply fill in and sign the form saying which product you want some have up to half a dozen choices. You should get the form around a month before your Tessa is due to mature, and the earlier you complete it the better as some companies pay extra interest on your Tessa in the meantime if you sign up to their Toisa. Your current Tessa manager should send you a Tessa maturity certificate within 30 days of your account maturing and the company you want to move your money to will need this as proof that you qualify for a Toisa.
If you take no immediate action, your bank or building society will move your matured Tessa capital and interest into a taxable instant access account. Alternatively, you can ask for a cheque straightaway.
In either case, you have six months to open a Toisa or put your money into a mini or maxi cash Isa. All you need to do is fill in an application form and send it with your maturity certificate and cheque to the new provider. Don't leave it to the last minute as it can take some time to process.
If you later want to transfer your Toisa or Cash Isa to another with a different company, make sure you ask the bank or building society to transfer the account for you. If you withdraw the money and try to move it yourself, you will have closed the Isa and lost the tax-free allowance.
Most banks and building societies say they cannot do automatic transfers from Tessas to Toisas or Cash Isas, so you will need a cheque to open the account in the first place.
Some fixed rate and stock market linked products will tie you in for anything between one and six years, but there are a number of instant access and short-term notice Isas to choose from. You should be able to easily switch between these to make sure you get the best rates. If you close an Isa down, you do not lose any tax relief already built up, but some fixed-term products carry heavy penalties for early closure or transfer.
As long as savers hold on to maturity they get back at least 100% of their capital even if the FTSE 100 falls. But if they want to transfer to another Cash Isa deal mid-term, the penalties are large 10% of capital invested if they move in year one, falling gradually to 6% in year five.
If you die, the Isa will end on that date, but all interest or bonuses up to that point will be tax-free.
Hargreaves Lansdown is a Bristol-based IFA firm