Intermediaries can add significant value for their clients by advising them on which Tessa rollover product to invest in, says Antony Stack
It is estimated that there are billions of pounds maturing under Tessas in 2001. This is a huge market and yet many advisers are missing out on the opportunities to access it, partly because they may not be aware of which clients have Tessas and when they mature.
My view is that this is because investors traditionally went directly to banks and building societies when making Tessa investments. Intermediaries were unable to add much value to the decision-making process and so were uninterested, except to ensure that their clients had made full use of all possible tax-exempt investments.
This is no longer the case, however. Intermediaries can now add value to their clients by advising them on which Tessa rollover product to invest in and garner additional commission for this advice.
Before we go into present opportunities, it might be useful to recap on the general Tessa history. The Tax Exempt Special Savings Account (Tessa) was first introduced in 1991. The first Tessas matured in 1996 and many thousands of investors simply rolled them over into a new generation of Tessas with the same product provider. Many of these rollover Tessas are maturing this year. However, Tessas are now a thing of the past and the Inland Revenue has developed a special Isa account to accommodate these maturing Tessas, known as a Tessa-only Isa (Toisa).
There are many Toisas on the market and it is by advising on these that the intermediary may add value to their client investment portfolios. Under the Isa rules, maturing Tessa capital can be reinvested into a Tessa-only Isa, with Toisas retaining the same tax-free status as Tessas. Because this is similar to a rollover, the maximum contribution allowance for a Toisa is based on the amount originally invested in the Tessa and does not affect the standard Isa allowance.
The interest earned on the Tessa may not, however, be invested in a Toisa and so there are many millions of pounds looking for additional investment advice. Many product providers who offer Toisas are also offering mini cash Isas into which the interest earned on the Tessa may be invested, for example.
There are effectively two broad types of Toisas available. The first is a simple rate-based account, either variable or fixed, which is offered by most of the high street banks and building societies. These Toisas could be most suitable for the types of investors who need a degree of liquidity. In choosing this option, investors should take into consideration the current rate of interest, the period for which this rate is guaranteed, the mandatory notice period required prior to withdrawal and any withdrawal fees.
One drawback of this type of Toisa is that many investors, initially attracted by the opening rate of interest, fail to realise that they should check if rates have fallen. This point has been dramatically illustrated over the past six months, where the base rate has fallen from 6% to 5.25% ' low levels by historical standards. The average rate of interest for variable rate Toisas is now only 5.78%, for example. With interest rates apparently moving downwards, many investors need to know the alternatives.
One option is the equity-linked Toisa. These are typically five-year investments and, as such, should only be considered by those who can afford to keep their investment tied up for the full term, as there is likely to be a market value adjustment made if the investor withdraws their investment before the full term is up.
The rate of return is calculated by a formula linked to an equity index, usually the FTSE 100. The attraction of these Toisas is clearly the higher potential return ' these products are very similar in structure to the equity-linked Tessas first introduced in 1996, the best of which have considerably outperformed the variable rate cash Tessas of that time.
Initially, most investors purchased their Tessas from banks or building societies, often without independent financial advice. Some advisers may therefore have no record of their clients' Tessa holdings. In addition, there is no compulsion on the maturing Tessa provider to mention that investors are free to reinvest the proceeds with a new provider.
What needs to be done to move funds into a Toisa from a maturing Tessa? All that is necessary is for the client to ask for a maturity certificate from their current Tessa provider. This should be provided within seven to ten days and may even be available on the spot.
The investor does not even have to transfer those funds from their existing institution, according to the guidance notes for Isa managers. The investor can subscribe for a Toisa up to the amount on the maturity certificate.
However, investors have only six months from the maturity of their Tessa to take out a new Toisa. Tessa holders who have not yet reinvested their maturities from early 2001 therefore only have a limited time left to take out a Toisa. Once the six-month time limit has passed, this valuable tax relief is gone forever, so advisers should act fast to ensure their clients do not lose this opportunity to extend their tax relief.
It is important to note that the time limit does not apply to transfers from existing Toisas. These can be done at any time, although there may be a withdrawal fee imposed by the original Toisa product provider.
So what are the business opportunities and rewards for financial advisers arising from maturing Tessas?
First, there is the commission generated from the sale of a Toisa. Second, the interest earned in the Tessa needs a new home and so additional commission may be generated from this investment.
Third, sending out a lead generator or mailer as part of a regular mail shot is a cost-effective way to identify and generate new business. Fourth, it is a relatively untapped market.
Finally, it is an obvious example of the added value provided by an investment professional.
In light of the recent FSA report on investor confidence in intermediaries, this level of service should encourage clients to consult their advisers more in the future on all areas of investment.
It is estimated that there are billions of pounds in Tessas maturing in 2001.
Investors in Tessas that matured in early 2001 now only have limited time to take out a Toisa.
Tessa holders do not have to stick with their existing bank or building society.
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