Get 7% tax-free annual income – ‘beat all savings accounts’ | Personal finance | Finance

Even though the Bank of England raised interest rates from 1.25% to 1.75% yesterday to curb inflation, savings accounts will continue to disappoint. Millions of people will see the value of their savings DESTROYED in real terms as prices soar.

Still, you could earn between five and seven percent a year tax-free in an Isa, beating even the best savings accounts.

The catch is that you have to assume a bit more investment risk, by investing in stocks or bonds.

Financial experts say everyone should have a rainy day fund of up to six months of pocket money held in easily accessible cash that they can get quickly.

However, longer-term savings will be more effective if invested in stocks and shares, which provide higher total returns over time.

The downside is that stock markets are more volatile, as values ​​can go up and down at any time, and your initial capital is not guaranteed.

However, if you can invest for a minimum of five years, and preferably longer, you can get a better return while reducing risk.

A fund called Schroder Income Maximizer currently offers a staggering 7.02% pa income, which you can take out of tax if you buy it as part of your £20,000 annual Isa allowance.

This fund invests primarily in UK dividend-paying stocks such as BP, Glaxo, HSBC and Shell, as well as some international stocks. They are solid, top-notch companies with relatively low risk.

As with all equity and equity funds, this income is not guaranteed and may vary depending on market conditions.

The fund has an annual management fee of 0.75%, which will be deducted from the income you receive.

A higher level of income means lower capital growth. Schroder Income Maximiser provided a total return of 8.5% last year and 15.9% measured over five years, according to Trustnet.com.

We asked investment expert Dzmitry Lipski, head of fund research at Interactive Investor, to name his three favorite high-income investment funds. Schroder Income Maximiser was not on the list.

LEARN MORE: How much could you earn on your savings with the new interest rate?

Instead, his first choice is Vanguard FTSE UK Equity Income Index Fund. He says this gives investors a wide range of over 100 income-generating stocks by tracking the FTSE UK Equity Income Index.

This reduces your risk by diversifying across a range of different companies and sectors. It earns 5.35% per year.

Best of all, it has a super low annual fee of just 0.14%, so you can keep more of your return rather than putting it back in as a fee.

Lipski’s second choice was M&G Emerging Markets Bond Fundwhich does not invest in equities and should therefore be less risky.

This fund aims to generate income and capital growth by investing in a diversified portfolio of government and corporate bonds issued in emerging markets such as Brazil, Indonesia, South Africa and Mexico .

This makes it riskier than bond funds targeting developed markets such as the US and UK, but it yields more income. “Claudia Calich has managed the fund since December 2013 and is very knowledgeable,” says Lipski.

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The fund pays an attractive return of 6.35% per year, according to Trustnet, which still gives you a high income after subtracting the annual charge of 0.70% per year.

Bond funds are less risky than stocks and stocks, so your capital is a little safer, although it won’t benefit from stock market growth.

Lipski’s final advice on high income is the Artemis Monthly Distribution Fund. This invests about 60% in bonds and 40% in stocks and shares.

“The mix of the two combines the capital growth and income potential of equities, with the greater predictability of bonds,” he says.

More than half of the portfolio is invested in the United States and the United Kingdom. “The fund is well-diversified, but its simplicity and significant foreign exposure set it apart,” says Lipski.

The current yield is lower than the others at 4.23% and you must deduct an annual management fee of 0.75%.

You could get almost as much from a five-year savings bond, with Aldermore paying 3.25%, but you won’t have access to your money during that time.

These are all reputable investment funds with a proven long-term track record. They will be more volatile than a savings account, but over five or ten years they should be much more profitable.

As with any investment, never put all your eggs in one basket and spread your money around to diversify and reduce risk.

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