Over the past months a lot has been written about the demise of Personal Equity Plans and the appearance of the new Individual Savings Accounts, or ISAs. Most people are aware that as from April 1999, PEPs will no longer be available, although existing holdings can remain where they are for five years and won't affect your new ISA allowance. You will even still be able to switch providers in that period should you wish. What has been often overlooked is the situation regarding Tessas, which is more complicated because of their natural five year life. With interest rates so low it is important to make the best of any cash you have on deposit if you are a taxpayer. So here is a brief guide to maximising your tax free cash.

If you haven't opened a Tessa yet, you can do so until April and invest the standard amounts for the next five years (£3,000, £1,800, 1,800, £1,800, £600- any shortfall can be made up in the final year - up to a maximum of £1,800.). Or you could also still invest the full £9,500 in one go. Provided that you won't need the cash for the whole of that period you might as well take advantage of the tax-free interest. Remember, you can always get access to the net interest each year if needed. This won't affect any allowance you can have for the new ISAs.

If you already have a Tessa, the action required depends on when it matures. If it is due to mature before January 5, 1999, the original capital may be rolled over into a follow-on Tessa which can stay where it is for another five years. If it is due to mature between January 5 and April 5 you have a choice between a follow-on Tessa or converting it to a cash ISA after April 5. If it is due to mature after April 5, you have six months to convert the original capital from the Tessa into a new ISA. None of these events will affect your annual allowances to the new ISAs.

The bad news is that, like the follow-on Tessas, only the original capital may be converted into an ISA. But, under the old rules, any extra interest you earned over the five years could not be kept as tax free cash. Under the new rules, because you can still have an ISA as well as a converted Tessa, you may be able to shelter some, or all, the interest tax-free.

For the first year of the new ISAs, you are allowed to shelter £3,000 as cash, after which the annual amount will reduce to £1,000. The Government have said that ISAs will be available for at least ten years, which means that overall the maximum cash that can be held tax free will be £12,000 instead of the old £9,000 limit, albeit the money has to be built up over a much longer period. The big plus point for smaller savers is that there is no five year lock in period and money should be able to be accessed quickly. Be careful - although the rules don't involve any penalties, any provider may include some sort of lower interest for shorter periods.

And if you are thinking about using up your full ISA allowance, to £7,000 in the first year (£5,000 in subsequent years) if you include shares (and 'Insurance' if any company is offering this!), don't rush in to a cash only 'Mini ISA' as it will reduce the amount you can invest elsewhere! Speak to an Independent Financial Adviser to find the most suitable ISA.

For a free factsheet on Best Rate TESSAs, Best Rate PEPs, or Individual Savings Accounts readers can call 01484 860123.

Alan Mills is an independent financial adviser with A. J. Mills Independent Financial Advisers, a member of DBS Financial Management PLC, which is regulated by the Personal Investment Authority. Not all contracts of PHI are regulated by the PIA. Answers given are for general guidance only and specific advice should be taken before acting on any of the suggestions made. All information is based on our understanding of current tax practices which are subject to change. The value of shares and investments can go down as well as up.

Converted for the new archive on 30 June 2000. Some images and formatting may have been lost in the conversion.