Actually Alan, I would probably suggest that you use all three of those investment vehicles. The key to a good investment portfolio is diversity.

That diversity applies not only to the investment funds you select, but also to the investment 'wrappers' into which you put those investment funds.

You should never put all your eggs into the same basket.

An ISA has the obvious advantage of being almost tax free. Any income you take from an ISA is free of income tax, and there will be no tax on any growth in your capital within the ISA. As a married couple, you could put up to £7,000 each into maxi ISAs in the current tax-year.

That's £14,000 between the two of you, that would produce a tax-free income of anywhere between 4 per cent and 6 per cent in a relatively moderate risk corporate bond or equity income fund.

Although not quite as tax efficient as an ISA, a unit trust offers another opportunity for investors looking for a tax-efficient income.

It is possible within a unit trust to invest in a range of relatively low yielding funds that are designed for capital growth.

The investor can then take an income in the form of capital
withdrawals from the fund, offsetting these withdrawals against their capital gains tax allowances each year.

Providing you do not withdraw at a rate above the growth of the fund, this can be a good way of taking income with no tax liability.

An investment bond also offers a similar 'income'
opportunity, as an investor can take withdrawals from a bond of up to 5 per cent of the original capital sum invested with no tax liability for up to 20 years.

A distribution bond is yet another option. This type of bond will typically produce a natural income yield without the need to draw on your capital at all.

In short, I would suggest you look at spreading your money between all three investments, within a broad range of equity income, distribution, corporate bond, property, and fixed interest funds.

Depending on the actual funds selected, this kind of portfolio should provide a tax efficient income of around 5% per annum.

Contacting Nick

Nick Plumb is an independent financial adviser. Send your questions to Nick at Bright Financial Planning, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to nickplumb@aol.com or telephone Nick on 01449 675674.

Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. For any readers requiring specific advice on their own circumstances, Nick is happy to offer a complimentary initial meeting.