Many people rely on their savings to top up their income once they retire, as few people have sufficient pension provision.

As people live longer many are retired 20 years or more, so any inflation can take a serious toll on the buying power of savings.

A sobering thought is what you can 'buy' with £10,000 without capitol losing ground. The best-paying deposit accounts might get you 7.5 per cent gross - six per cent after tax . If you take off the rate of inflation, say around three percent, this means £10,000 would generate actual spending money of just £300 a year - not £1 a day! With interest rates set to fall and low inflation, it's grim for deposit savers. The new tax-free National Savings issue gives a five year fixed rate of only four percent.

Everyone should keep some money readily accessible on deposit for short term needs, but to generate any worthwhile income you must seek a combination of capital growth and a rising income. Most people now know the growth potential of stock market linked investments such as shares, unit trusts, and equity-based PEPs but often overlook Distribution Funds. These offer a degree of capital growth and, often more importantly, a rising income.

Investors' money is pooled and looked after by a fund manager. There will be quite a high exposure to stocks and shares, but a fund may also include a great level of Gilts fixed interest securities and, sometimes, property. This gives a more defensive strategy than purely equity-based funds and should be less volatile. Twice a year a 'distribution' will be made from the fund to the investors - perhaps five per cent based on the actual fund value rather than the amount of starting capital.

So over time, provided the fund achieves a reasonable growth rate, your income increases. This can't happen with a deposit account if you spend all the interest. Because the fund includes a fair proportion of stocks and shares whose value varies daily with market movements, it should be seen as a medium to long-term investment.

Under a distribution bond, there is no further income tax to pay for basic rate taxpayers, and no Capital Gains Tax either. A number of companies run these and it is sensible to look for one with a good track record, although this doesn't guarantee future performance.

For free details on Distribution Bonds call 01484 860123.

Alan Mills is an independent financial adviser with A. J. Mills Independent Financial Advisers, a member of DBS Financial Management PLC, which is regulated by the Personal Investment Authority. Not all contracts of PHI are regulated by the PIA. Answers given are for general guidance only and specific advice should be taken before acting on any of the suggestions made. All information is based on our understanding of current tax practices which are subject to change. The value of shares and investments can go down as well as up.

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