Savings accounts pay just 1% but you could get 7% retirement income that RISES every year

Inflation: Victoria Scholar discusses rise in interest rates

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Better still, that income should rise every year, helping to reduce the damage inflicted by today’s rampant inflation. You can also take it tax-free, so you pay no income tax to HMRC, either.

The challenge facing savers who want to generate that level of income is that they need to take on more risk by investing in stocks and shares.

This is not right for everybody, but investors can reduce the volatility by choosing a fund that spreads your money between dozens of different companies.

Past performance is no guarantee of future success, but the following two funds have a proven track record stretching back decades. They can be bought inside your annual £20,000 Isa allowance, which means all income and capital growth is free of tax.

The Association of Investment Companies has produced a list of equity income funds that have a history of increasing the dividends they pay each year, which is more vital than ever now as inflation rages.

These funds invest in a spread of companies that reward shareholders by paying regular dividends from profits.

City of London Investment Trust is one of the most popular equity income funds of all.

Launched in 1964, this £2billion fund has increased the dividends it pays every single year for an astonishing 56 years.

Dividend-paying stocks and funds are attractive in times of economic turmoil, says Laith Khalaf, head of investment analysis at fund platform AJ Bell.

“They offer investors a reliable stream of dividend payouts, even if share prices fall.”

Investors can either take those dividends as income to fund their retirement, or reinvest them back into the fund for long-term growth.

Khalaf says a regular dividend protects the share price, too. “Investors don’t want to give up their income stream by selling the stock, and are happy to hold on for better times.”

City of London investment Trust mostly invests in big FTSE 100 stocks, such as British American Tobacco, Shell, HSBC, Glaxo and BP.

It has been paying investors income of 4.81 percent a year, plus the opportunity for capital growth when stock markets are rising. It has an annual charge of 0.33 percent.

Despite this year’s stock market dip, the fund has actually grown by a steady 8.6 per cent. That capital growth is on top of the income investors get.

Over three years, it is up 15.9 percent. So although your capital is at risk, so far investors have made money instead.

Remember, none of this is guaranteed, but few can match this fund’s solid performance.

Khalaf picks out another income stock with a long-term track record called Abrdn Equity Income, which has increased its dividends every year for the past 21 years.

It offers a higher yield than City of London, paying income of a staggering 6.98 percent a year, recent AIC figures show.

Abrdn Equity Income also invests in top FTSE stocks such as BP and Shell, mining companies BHP and Rio Tinto and power firm SSE.

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But it also invests in smaller companies, Khalaf says. “This does makes it higher risk, but it can also boost your overall returns as smaller businesses can grow faster than larger ones.”

So as well as income, you might get capital growth on top. The fund has an annual charge of 0.65 percent.

Smaller companies have been hit harder than larger ones in this year’s stock market sell off, and they could struggle further as the UK slips into recession.

The fund has fallen by 3.5 percent over the last year, and is up just 1.7 percent over three years, but could rebound sharply when the economy recovers.

“It may be too risky for some,” Khalaf says.

You should never invest in the stock markets unless you can leave your capital there for at least five to 10 years, to give it time to recover from any short-term volatility, says Interactive Investor’s head of investment Victoria Scholar. “It is also important to keep some money in cash to cover everyday spending and emergencies.”

If new to investing, consider taking independent financial advice, Scholar adds.

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