Switching for happier returns: With a wide spread in the rates on offer, Neasa MacErlean advises Tessa holders to consider transferring their accounts

TESSAS were introduced two years ago by John Major when he was Chancellor to allow full tax relief on savings of up to pounds 9,000 - but on condition that the capital in the account remained untouched for five years.

In the first year, Tessa investors can put in a maximum of pounds 3,000. Maximum annual investments thereafter are pounds 1,800 until the saver reaches the pounds 9,000 ceiling. Interest can be withdrawn during the life of the Tessa, but any capital withdrawals trigger the retrospective loss of all tax relief.

Tessas are of particular interest to higher rate taxpayers, but the tax breaks are also attractive to others. It is worth opening a Tessa savings account rather than an account paying net interest; if you stay the course, there is a bonus.

MOST of the 3.3 million savers with Tax Exempt Special Savings Accounts are receiving substantially lower interest rates than the best on offer. The highest Tessa returns are coming from some of the medium- sized building societies, far outstripping the rates offered by the big four banks.

It is no surprise that the market is confused. Tessas are only two years old, and it has taken that long for the big players to build up a track record. Analysing the performance of the banks and building societies is also difficult, because of their frequently changing interest rates and their different payment dates and Tessa structures. However, the National Counties Building Society, the 34th-largest society, has carried out a performance analysis.

The society's offered rates are consistently among the best and, albeit by its own calculation, it comes first in the league table. A Tessa holder who has made the maximum investments with National Counties over the past two years would be accruing a tax-free return 33 per cent higher than a similar investment made with the table's back marker, the Hinckley & Rugby Building Society.

National Counties also outstrips Lloyds and Midland Bank, for example, by about 22 per cent.

From the start of January, its rate follows the larger institutions on a downward course, but it will still be 2.25 per cent higher than Lloyds and Midland at 8.75 per cent.

Donna O'Shea, an investment adviser with Chase de Vere, believes that many Tessa holders would ultimately be better off by transferring their funds. But she said: 'They would need to check the transfer penalties very carefully.'

National Counties has one of the toughest penalties in its 90- day, loss-of-interest clause. More typical is Barclays Bank, which charges a transfer fee of pounds 25. By contrast, the Halifax Building Society's 600,000 Tessa holders are given a strong disincentive against transferring through a series of annual bonus interest points, deductible retrospectively if the investment is moved before the end of its five-year life.

The Halifax is also unusual in refusing to accept transfers. But both table leaders will greet transferees with open arms.

Despite their attractive interest rates, the National Counties and the North of England building societies have between them less than a 1 per cent share in the pounds 11bn Tessa market. The big four banks are thought to have the lion's share.

A spokeswoman for Barclays accepted that higher returns are available but said: 'There are other factors that you need to take into account. We're providing convenience for our customers.' Barclays customers need only make an investment of pounds 25, while National Counties Tessa holders must make the maximum Tessa lump sum investments, starting with pounds 3,000 in the first year.

Tessa holders with Barclays can get access to their accounts in most high streets, while National Counties savers must communicate through the post with the society's only office in Epsom.

Tim Cadel, marketing manager at National Counties, said the society was focusing on customers who valued investment return above easy access.

'We do target what we call high-balance, low-transaction accounts. There is a high cost in new account acquisition, and without branches there is a challenge in acquiring new business. The Tessa customer is a financially aware customer. This is the right account for the type of customer we are trying to attract.'

Mr Cadel believes there will continue to be a disparity of at least 2 to 2.25 per cent among the Tessa providers on his society's league table. If he is correct, many Tessa holders will find that they could benefit from switching institutions.

While it lists most of the leading Tessa providers, the National Counties table omits two of the most competitive banks. The Exeter Bank and the Allied Trust Bank are frequently featured in the 'best buy' tables, but are excluded from this table because they are not among the largest British banks.

Investors should pay particular attention to their need for cash flow in a time of recession. According to the Inland Revenue, one in 20 Tessa investors have had to cancel their Tessas to get their money back.

----------------------------------------------------------------- The best & worst of TESSAs ----------------------------------------------------------------- The best pounds %* 1 National Counties BS 5858.50 9.60 2 North of England BS 5803.27 8.50 3 Lambeth BS 5800.82 9.00 4 Derbyshire BS 5798.81 8.50 5 Darlington BS 5796.11 8.50 The worst 44 Midland Bank 5664.72 6.75 45 Portman BS 5646.75 6.70 46 Staffordshire BS 5637.97 7.50 47 Bank of Scotland 5623.16 6.09 48 Hinckley & Rugby BS 5607.48 6.75 ----------------------------------------------------------------- Top 40 building societies and top eight banks. An investment of pounds 3,000 at launch in January 1991, plus pounds 1,800 added in January 1992. Interest credited on 31 December, 1992. Fixed rates excluded. ----------------------------------------------------------------- * Rate as of 1/12/92 Source: National Counties BS -----------------------------------------------------------------

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