Where to go if you want high income

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The Independent Online
NEEDS for income change throughout our lives. Early on in retirement, most investors need a reasonable and growing income. Later on, they might want to maximise income, regardless of the risk to their capital, writes Clare Arthur.

A wide variety of investment trusts meet most investors' needs, from a very high income to regular returns which are virtually guaranteed.

The structure of investment trusts can help their potential for producing a sustained and high level of income. They often have low management charges. Some trade at a discount, meaning you can buy an income stream at less than its normal price. Perhaps most importantly for investors who rely on a steady income, investment trusts can put some income into reserve in good years, enabling them to sustain dividends through more difficult periods.

Investment trusts normally pay dividends twice a year with a tax credit equal to the lower rate of income tax. Basic-rate taxpayers need pay no more, but higher-rate taxpayers must stump up another 20 per cent, while non-taxpayers can reclaim the 20 per cent tax already deducted. Many income-oriented trustsqualify for inclusion in a PEP up to the full pounds 6,000 limit.

Investors must understand what they are buying. Graham Hooper, a director of Bath-based independent financial adviser Chase de Vere, said: "People think they know all about investment trusts, but they are very complicated things. It's all too easy to invest in the wrong share for your purposes."

Investors who have just retired may have to live on their investments for 20 or 30 years. It is therefore important for them to protect and grow the capital which is producing their income.

Many income-oriented investment trusts concentrate on companies paying moderate dividends, but which offer good potential for growth in both share price and dividends. This type of trust, often called UK income growth, is popular, and shares often trade at a price higher than the net asset value of the fund's underlying investments.

Chris Macdonald, managing director of London independent financial adviser Brooks Macdonald Gayer, recommends two income growth trusts - Dunedin Income Growth and Temple Bar. He said: "Dunedin has suffered management problems recently, but this is reflected in the price of the shares, which are standing at a 9 per cent discount to the fund's net asset value." The trust is yielding 4.7 per cent, and dividends are paid in October and April.

Temple Bar Investment Trust, which is managed by Guinness Flight, stands at a discount of 6 per cent, and yields 4.8 per cent. Its dividends are paid in September and March.

Investors who need a high income straight away may do better by investing in high income trusts. These pay a high income now by investing in high- yielding equities, fixed-interest securities and convertible shares. But high-income trusts offer little opportunity for growth in income and capital over the longer term.You could find your income and capital falling in value against the cost of living if inflation takes off.

The structure of split-capital investment trusts enables them to offer substantially higher income than conventional trusts.

Splits offer several types of share within the one fund. Capital shares aim to provide the investor with an unknown quantity of capital growth but no dividends. Zero dividend preference shares yield no dividends, but pay out a predetermined capital sum when the investment trust is wound up. Holders of income shares are entitled to all the income produced by the trust, but the amount of money they receive on redemption varies according to the share's terms.

The traditional income share has a predetermined redemption value, typically pounds 1. Others have a fixed redemption price but are also entitled to a proportion of any remaining capital left over. Annuity income shares offer a very high level of income but repay next to nothing when the trust is wound up.