MONEY COMMENT
A Tax-Free, Risk-Free Account

By Cliff D'Arcy
June 4, 2003

The three-year bear market in shares has scared off many investors from investing in the stock market for the time being. Sales of share ISAs have tumbled in recent years as investors have become spooked by capital losses.

However, sales of cash mini-ISAs are doing very nicely indeed. These savings accounts allow anyone 16 or over to save up to £3,000 every Tax Year and earn tax-free interest: a safe haven for your cash. However, there's another savings account that allows you to deposit a lump sum of up to £9,000 and earn interest tax-free. It's called the TESSA-only ISA, or TOISA.

TESSAs (Tax-Exempt Special Savings Accounts), the forerunner of the cash mini-ISA, were abolished on 5 April 1999. TESSAs allow you save up to £9,000 over five years and, if you didn't touch your capital for the full five years, you received your interest tax-free. Affluent savers would invest the maximum £3,000 in a TESSA in the first year, followed by £1,800 for three years and £600 in the final year.

So, TESSAs are dying out, but they're not dead yet. One point to note is that we're in the final year for the last batch of TESSAs, which means that TESSA savers can put money away for one last time. Your final payment is limited to £9,000 less what you've already saved, up to a maximum of £1,800. So, the maximum you can pay in will be between £600 and £1,800 in year five.

My wife's TESSA is due to mature shortly and, with the accumulated interest, it's a tidy sum. She would like to transfer the capital (the accrued interest cannot be transferred) into a TOISA to allow her to continue to save tax-free. As for the accrued interest, this can go into my wife's cash mini-ISA to earn more tax-free interest.

Her building society is keen for her to buy its TOISA but I've been shopping around to find her the best interest rate. I want her new account to do the following:

• Meet the government's CAT standards (for Charges, Access and Terms)
• Allow penalty-free transfers (in case the interest rate becomes uncompetitive and she decides to move)
• Offer a higher rate of interest than her current provider.

According to my June copy of Moneyfacts, which arrived hot off the press this morning, the best rate for a TOISA meeting these criteria is 4.2% with the small but beautiful Kent Reliance BS. The extra interest is well worth having, as it works out at about £34 a year. Also, as my wife will only need access to this money in emergencies, she's happy to run her TOISA by post (note that KRBS doesn't have any branches outside of Kent).

Note that you need to move your TESSA capital within six months of its maturity date and you'll need a maturity certificate to open your new TOISA. DO NOT close your TESSA, withdraw the cash and attempt to open a TOISA, as this doesn't work!

So, at the latest, you've got until Friday, 2 April next year to make the final payment(s) into your TESSA, but don't hang about - act today!

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