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Interest rates and income at record low

The Bank of England is keeping interest rates at a record low.

The UK is set squarely between the European Central Bank, which is increasing its stimulus of the euro-area economy, and the US Federal Reserve, which started raising interest rates in December. Economists predict that the Bank of England will prefer to wait to see how the outlook evolves before the first rate increase in more than eight years. Vicky Redwood, Chief UK Economist of Capital Economics has been quoted as saying "Financial markets remain convinced that interest rates will stay on hold for all of next year " in fact, the first hike is currently not expected until April 2017.

If this proves to be correct, where should investors be looking for income? This demand will grow as the baby-boomer generation across the developed world moves into retirement and looks to turn capital into an income stream. Cash deposits and cash ISAs are fine for an emergency fund, but they are hardly fit for purpose where a regular income is required. Fixed interest investments have been written off by commentators because of the expected pressure on capital values as interest rates rise. However, if there is to be a delay in rates rising then fixed interest investments, particularly held in a fund where the manager can adjust the average duration of the stocks held, could still be a good source of income.

Equity investments can also provide a good level of income. There are 52 funds in the UK Equity Income sector providing a dividend income of at least 4.0% and 22 funds in the Global Income sector providing at least 3.0%. A global approach offers investors diversification benefits and the opportunity to receive income from different sources throughout the year.

Dividend income should be of more interest to many investors after April 2016 with the introduction of the £5,000 tax-free dividend allowance for all taxpayers. For those who will exceed this level of dividend income then building up a stocks and shares ISA portfolio will be essential.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.