Tax Exempt Special Savings Account (TESSA): A Historical Savings System

Key Features

• Tax Exemption: Interest earned on TESSAs was completely tax-free, which was particularly attractive to small savers.
• Investment Limits: Individuals could invest up to £9,000 over a five-year term, with annual limits on contributions.
• Fixed Term: TESSAs had a fixed term of five years.
• Reinvestment: Upon maturity, the capital could be reinvested into another TESSA or transferred to an Individual Savings Account (ISA) without affecting the individual’s annual ISA allowance.

Transition to ISAs

TESSAs were closed to new investors in April 1999 with the introduction of Individual Savings Accounts (ISAs). ISAs offered a broader range of investment options and higher contribution limits. The transition allowed maturing TESSAs to roll over into ISAs, providing continuity for savers.

Importance

The introduction of TESSAs marked a significant step in promoting savings among individuals in the UK, especially those with limited funds. The tax-free interest served as an incentive to save, and the structured nature of TESSAs helped inculcate disciplined saving habits.

Related Terms

• ISA (Individual Savings Account): The successor to TESSAs, offering tax-free savings with more flexible options and higher limits.
• Fixed-Rate Savings Account: A savings account with a fixed interest rate for a set period, similar to TESSAs in its fixed-term nature.
• Building Society: Financial institutions in the UK that offer savings and mortgage lending services; many offered TESSAs.

FAQs

Q: Can I open a new TESSA today?
A: No, TESSAs were closed to new investors in April 1999 and have been replaced by ISAs.

Q: What happens to a maturing TESSA?
A: The capital from a maturing TESSA can be reinvested into an ISA without counting against the annual ISA contribution limit.

Q: Are the interest rates on TESSAs fixed?
A: Yes, TESSAs typically offered a fixed interest rate for the five-year term.