I should be grateful if you would be able to advise me with regards to my strategy for generating investment income.

My wife and I have investments in several funds [see adjacent table], but my worry is that these funds have been invested for at least seven years, and I want to generate as much income as possible. Is this a sensible way of going about it?
A Davidson, Sunderland

Investments made by Mr Davidson
2000 Skandia CAB SK Fidelity Special Sits
2000 NFU Capital Investment Bond
1998 Clerical Medical Distribution Bond
1998 St James Place Investment Bond
1997 M&G Corporate Bond
1997 New Star Fixed Interest
1993 AXA Sun Life Distribution

Andrew Merricks replies:
It is not entirely clear from the list of investments provided by Mr Davidson whether the investments that are not investment bonds (M&G and New Star) are held within ISA or PEP wrappers or not. This is one of the first steps to take when seeking income, as income from such wrappers is currently tax free.

From the investment bonds, one can take a maximum five per cent per annum ‘income’, although one needs to be careful as this income is effectively return of the original capital over 20 years. In addition, the five per cent level of income is based upon the original capital sum invested, so it cannot benefit from rising income from dividends, for example.

It would be useful to know how much is in each of the bonds and whether there are any surrender penalties in place. If not, and if income is the main priority now, it may be sensible to consider encashing the bonds and starting again within a wrap account. This allows far more flexibility regarding the level of income that you can receive, as well as providing a wider investment remit from which the income can be derived.

Cash can also be used to greater effect within a wrap account. I have written about my ‘water tank’ method of income provision in the Money Doctor column previously and

I would be happy to forward details of this to Mr Davidson, and other interested What Investment readers, if he would like me to do so.