John Major had only a brief tenure as Chancellor of the Exchequer but the legacy of his tax-exempt special savings account lives on – at least for now.
The Tessa was introduced in January 1991 and the first rollover product was launched in 1996, with the full £9,000 able to be placed straight into a tax-efficient vehicle.
A variety of rollover Tessas were available, with variable and fixed rates accounting for the bulk of accounts. But the first stockmarket-linked Tessas were also seen at this time.
The first three months of 2001 will see around £14bn mature from these first Tessa rollover products. Due to the changes introduced by Chancellor Gordon Brown, the capital can now be rolled into Tessa-only Isas – or Toisas – with the accumulated interest having to be taken out.
Importantly, Toisas are an additional allowance above the usual Isa allowance.
The average Tessa maturing this year will return not only the £9,000 initial capital but also around £3,500 in accumulated interest. Advisers and clients will be looking at the various options to decide on the next move.
The first point worth noting is that there is not a great deal of time to ponder this. With each maturing Tessa cheque, clients will receive a maturity certificate. This needs to be sent in when purchasing a rollover product. However, these are valid for six months only – after that a client cannot reinvest and loses the tax advantage permanently. For those who do not need the cash immediately, rolling over seems a prudent move.
There are three types of Toisas available – variable, fixed and stockmarket-linked. These latter accounts have proved very successful over the last five years. Generally, they provide equity exposure with a downside protection. However, due to the complex structure, they may penalise those who need to withdraw their money before the end of the term and are therefore not suitable for the elderly or those who may need the cash before 2006.
However, for those happier with equity exposure and willing to lock in their money for five years, returns can be significantly higher.
As one would expect, the banks and building societies dominate the Toisa market, predominantly with a mixture of fixed and variable products. They will undoubtedly make strenuous efforts to encourage your clients to move straight into their Toisa and perhaps even leave the interest in a normal deposit account or cash mini Isa.
Clients will need guidance, first to ensure their capital is working hard for them but also that their annual Isa allowance is not compromised by opening a cash Isa. Th
is is a real danger. HSBC's research indicates that four million Tessa holders do not know the rules on reinvesting their funds, with one million of these unsure when their Tessa matures.
Many advisers may not even be aware that their clients hold Tessas. However, research shows that most Tessa holders fall into the ABC1 socio-economic group. In other words, they have the same profile as the average IFA clients.
It is worth revisiting client banks and asking whether they have a Tessa and, if so, with whom? Accumulated interest could go some way to funding a maxi Isa and the capital should be taken into account as part of a client's overall financial planning.
Anecdotal evidence suggests many people have not previously mentioned Tessas to their broker as they consider it to be just a bank account. IFAs can show them it is more than that.