How investors can have their income cake and eat it

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The Independent Online
Falling interest rates are putting the squeeze on investors who rely on savings, threatening them with a choice of selling assets or reducing living standards. But there is an alternative. It is to buy the "income shares" issued by a certain kind of investment trust known as a "split level trust". These shares take the lion's share of all dividends from the investment trust. Dividends are still on an upward trend, unlike interest rates. So they can provide a very high income - typically around 11 per cent at the moment.

They can give you just as much income as an annuity, without involving the sacrifice of all your capital. They enable you to have your income cake and eat it too. And, as dividend income grows, you still have the possibility of seeing your income grow too. You won't get the sort of capital growth an equity income fund tends to produce, but you should retain a decent sum to hand on to your family.

And if you change your mind there is nothing to stop you selling your income shares and either investing in something else or simply spending some of the money.

In recent years the emergence of unit trusts investing entirely or mainly in a portfolio of income shares has transformed income shares from being the preserve of wealthy individuals and financial institutions into an investment which the average person can now consider. Unit trusts based on income shares can also be held in a Personal Equity Plan, which adds tax advantages to the attractions of a high income.

If you invested your full PEP allowance of pounds 6,000 in an income share fund which yielded 10 per cent a year for 10 years you could hope to have net income over that period of pounds 600 a year, or pounds 6,000 in all. On this the cumulative tax saving, on current rates of income tax, would be between pounds l,200 and pounds 2,400. You would certainly be getting full value out of the PEP's freedom from income tax.

Chris Whittingslow is investment director of Exeter Fund Managers (01392 412144)

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