Happy returns on the hop

If you rely on investment income, you must feel like you're caught between a rock and a hard place.

The base rate has been below 6 per cent since the end of 1999, and most bank and building society deposit accounts have paid much less. At the same time, share income is low. The average gross yield produced by the FTSE All Share is 2.37 per cent. The cuts on with-profits bond annual bonuses is just salt in the wound.

However, as anyone who has read Cash 's guides to fixing your finances over the past eight weeks will know, it is always possible to make your money work harder. In the last of the series, we look at how a little rejigging of your investments can increase your income.

Most income investors are near or at retirement; your instinct may be to leave everything in a deposit account. That's fine if capital security is the most important thing to you, but make sure you are earning the best rate available. Check the Moneyfacts website for latest rates.

Janine Starks of Bath independent financial adviser Chase de Vere says your approach to producing income should be based on the amount you have to invest, your attitude to risk, and how long you are likely to need an income. If you have few savings, you cannot afford to lose any, and should stick to low-risk investments such as building society deposits and guaranteed income bonds. If the idea of investing on the stock market is going to keep you awake at night, don't do it. And if you are at the beginning of your retirement, you need to take care of your capital and ensure income keeps pace with inflation.

Ideally, you should aim for a mix - deposits and guaranteed income bonds to provide security, corporate bonds and gilts to provide a reasonable level of income, and equities (via unit trusts, Oeics and investment trusts) for capital growth. If that sounds like hard work, consider investments designed to satisfy all three needs through one professionally managed portfolio of assets, such as with-profits bonds and distribution bonds.

Organising a portfolio of investments for income can be tricky; if you don't want to do it yourself, employ an independent financial adviser. Some charge between £50 and £200 an hour but you should be able to negotiate a rebate of commission on any products you buy through them.

Finally, be realistic. Nelson Money Managers' David Hanratty says the level of income you are able to earn at the moment may seem low - about 5 per cent on many bonds and gilts - but then so is inflation - 1.5 per cent excluding mortgage interest rates. 'This gives you a real return [the amount after inflation] of 3.5 per cent,' he says. 'That's a good yield historically - the average real return for gilts since 1918 is 2.3 per cent. And you can earn that with absolutely no risk to your capital if you hold your gilt to maturity. Income investors have got it pretty good at the moment, all things considered.'

How to invest for success

? Register as a non-taxpayer. IFA Promotion
estimates that ?300m will be lost this year through
unnecessary tax paid on savings accounts. If you
are eligible to earn untaxed interest, ask your
bank or building society for an R85 form.

? Watch the interest rate paid on your savings
accounts. Many lenders offer a high headline rate
only to drop it a few months later.

? Keep tabs on the performance of equity and
bond investments. Make sure you know if one of
your fund managers is changing jobs or has gone
off the boil, and ask your independent financial
adviser whether you should consider switching
funds.

? Maximise use of your annual Isa allowance. You
can put up to ?3,000 in cash and ?3,000 in stocks
and shares mini Isas, or up to ?7,000 in a maxi Isa
each tax year. If you can't afford to invest new
money, transfer existing unit trust and cash
investments that are not protected from tax.

? Buy your investments through a discount broker
or negotiate a commission rebate with your
independent financial adviser. The commission
rebate can usually be added to the value of your
investment, increasing the amount you can earn.

? Use your capital gains tax allowance,
particularly if you are a higher-rate taxpayer. If
you need to receive a fixed amount of money on
a certain date - to pay school fees, for example -
consider investing in zero-dividend preference
shares, which produce a predetermined capital
return on a fixed date.

? Don't put all your money in one investment,
even if it's paying a great income. Spread your
cash and reduce the risk; it might not give the
highest possible income at the outset, but it will
protect your earnings in the long run.

? If your spouse is a non-tax payer or pays a lower
rate than yourself, consider transferring some of
your investments into his or her name.

? Try not to withdraw all returns from your
investments in the first few years. The more you
let them grow, the more income they will produce
for you in the future.

? Consult an independent financial adviser. For a
free list of IFAs in your area, call IFA Promotion
on 0800 0853250 or visit the website at www.unbiased.co.uk
.