Millions hit by Tessa rip-off

Millions of savers with tax exempt special savings accounts (Tessas) are receiving up to a third less interest than individual savings account (Isa) holders, even though the two products are almost identical. It has emerged that while banks and building societies spent millions of pounds marketing Tessas to investors earlier this year, most have slashed the rates payable on the accounts since Isas were launched.

Tessas were closed to new investors in April at the same time as the government launched Isas. But the accounts run for five years and anyone who opened a Tessa before 6 April is allowed to continue saving until their account matures. In May, the Bank of England estimated that savers still had around ?33 billion invested in Tessas.

However, research by bank and building society data provider Moneyfacts shows that just four of the top 30 banks and societies pay at least the same rates of interest on both Tessas and Isas. Melanie Stewart, savings editor at Moneyfacts, says the problem is that product providers have lost interest in Tessas, now that it is no longer possible to open a new account. 'Now that the emphasis is on the sale of Isas, Tessa rates have been reduced,' Stewart says. Most bank and building societies have passed on recent Bank of England base rate cuts to Tessa savers in full, but maintained the rates payable to Isa savers. Tessa savers' raw deal is made worse by the fact that they are stuck with their accounts until maturity. Savers who cash in their Tessas early, in order to transfer their savings to an Isa, lose the right to receive their interest free of tax.

Among the worst offenders, Cheltenham & Gloucester pays an annual rate of 6.25 per cent to savers who invest ?3,000, the maximum allowed, in its cash mini-Isas. In contrast, savers with ?3,000 in a C&G Tessa get just 3.90 per cent a year. Similarly, Abbey National pays 6.40 per cent a year on balances of ?3,000 in its cash mini-Isas but just 4.35 per cent annually on the same amount in a Tessa. And the Woolwich pays 6 per cent a year to Isa savers but only 4.05 per cent year to Tessa savers. Doug Kyriacou, a spokesperson for Abbey National, admits that there is no justification for rewarding Isa savers more generously than those with Tessas. 'There isn't a particular reason. Isas are paying a higher rate simply because we are very keen to encourage people to invest in our Isas,' Kyriacou says. Woolwich spokesperson Anne Perkins also concedes that the discrepancy between Tessas and Isas is unfair. But she argues: 'You can always transfer to another Tessa provider.'

However, while the Woolwich does not penalise savers who abandon their Tessa for another account provider, most banks and building societies do. Abbey National charges a ?20 fee for transfers, for example, and others have even steeper penalties. Savers who transfer out of a Portman Tessa lose up to 180 days' interest.

On the other hand, savers who decide to put up with poor interest rates in order to avoid transfer penalties may go on losing even after their Tessas have matured. On maturity, savers may roll over their Tessas into Tessa-only Isas, without their normal Isa allowance for the year being affected. But many providers offer the same stingy - or even worse - interest rates on Tessa-only Isas.

Moneyfacts' Stewart also warns savers to be on the look out for Isa providers which reduce their interest rates once they feel they have attracted a decent amount of new business. She says: 'It will be interesting to see what happens next year when the maximum investment [in a cash mini-Isa] falls to ?1,000 - will providers feel able to maintain rates at these sorts of levels?' Abbey National, for one, thinks not. 'We don't anticipate rates staying this high,' Kyriacou concedes.

However, not all providers are penalising Tessa investors. Bristol & West, Leeds & Holbeck and Midland Bank, for example, are all paying the same rates on both Tessas and Isas. 'Cash Isas were effectively just replacing Tessas so we felt they ought to be priced consistently in order to be equitable,' says Paul Vinnicombe of Bristol & West.