These are not good times for income-seekers. The gross yield on the FTSE All-Share index is under 3 per cent compared with 4 per cent at the start of 1995 and nearly 5.5 per cent at the beginning of 1991.
There is worse news overseas. The FT/S&P World (ex-UK) index can only muster a gross yield of 1.6 per cent and even this is achieved only with the help of some relatively high-yielding Pacific markets.
There is little solace to be found in bonds. At 6 per cent, long-dated gilt yields are back to the levels of the mid-1960s. Of the main markets, only New Zealand offers higher government bond yields.
For UK equity income unit and investment trusts, the problem of low yields has been compounded by the change to tax credits on dividends. The typical 1.5 per cent annual charge on a UK equity income unit trust implies a Budget cut in the after-tax yield of up to 0.3 per cent a year.
Worse is on its way when ISAs replace Peps. The 20 per cent tax credit boost enjoyed by Peps will fall to 10 per cent for ISAs and that will last only five years. Net dividend income of £80 today is turned into £100 tax-free income via a Pep. But it will be worth only £88.89 from an ISA until 2004.
The unit-trust industry's main response to falling yields has been a move towards deducting charges from capital rather than income. For most non-Pep investors, this change is tax-neutral although higher-rate taxpayers are generally worse off. Pep investors win as more income means more tax credit repaid – for the moment.
Setting charges against capital is probably wiser than switching to higher-yielding shares, as some managers did to their regret a few years ago. Separating charges and income gives managers more investment flexibility. But they are still left facing that 3 per cent market yield.
On the other side of the investment fence, companies are re-examining their policies towards the payment of dividends. The pressure from financial institutions, particularly pension funds, to maximise distributions has eased.
With tax credits unreclaimable, it no longer matters to a gross fund whether the investment returns it receives are by way of capital or income. But until advance corporation tax ends in April 1999, the distinction still matters for companies.
The result for now is a proliferation of B-share issues, used to return excess capital to investors. Once ACT has gone, the distinction between capital and income will largely disappear for companies and institutional investors.
This blurring of the lines between capital and income is nothing new. Companies have always had the option to retain their profits rather than make distributions. If the tax effect is neutral, it should not matter to the investor which option the company chooses.
This raises the question of whether the income-seeking investor should still be compartmentalising returns between dividend income and capital performance. If that barrier is broken down, the investor can choose how much of their return should be in the form of regular payments.
Enter the unit-trust withdrawal plan with predetermined encashments.
The idea is an old one, – and this is its biggest problem. Unit-trust withdrawal plans bloomed in the heady days of the early 1970s. The process of making withdrawals of 10 per cent a year ran into the great bear market of 1973-74 and the plans and their investors evaporated. Hardly anyone has ventured back since.
Such restraint is puzzling. Often, the same investment groups which have shied away from unit-trust withdrawal plans have promoted "5 per cent withdrawals" from their investment bonds.
Similarly, advisers who would be wary of recommending any form of unit-trust strip have happily extolled the "income flexibility" of life insurance bonds. The fact that the bond fund may have been invested largely in unit trusts has been somehow forgotten.
The acceptability of withdrawal schemes to provide "income" is not limited to investment bonds. Look no further than personal pension income drawdown. To judge by the volume of business being written, plenty of advisers have no qualms about clients making regular withdrawals from equity-based funds to provide replacement pension income.
Allowing for the effects of additional charges and mortality drag, the pension policyholder could be relying solely on capital performance to match overall annuity returns.
If withdrawal schemes are so widely accepted elsewhere, how long can it be before the unit-trust industry decides to join in? Perhaps its attitude will change with Autif's new managed unit trust sector.
This contains funds which in many respects mirror the investment approach of the life managed fund sector, with holdings of at least 10 per cent in non-UK equities and 10 per cent or more in bonds, property and/or cash. The old excuse of choosing a life managed fund because of its broad investment spread no longer holds water, if it ever did.
For all but a handful of investors, the managed unit trust has distinct advantages over its life insurance counterpart in terms of CGT. Encashment of unit-trust units under a withdrawal scheme will normally be free of CGT, due to the combination of the annual exemption and indexation relief.
Within the investment bond fund, there is no escaping the 23 per cent tax levied on the life company's capital gains, even though it is invisible to investors.
Drawing capital as income is bound to leave some advisers and clients initially feeling uncomfortable. The concept of overall investment return, so familiar in league tables, will take a little getting used to when applied to drawings.
Nevertheless, even those who choose to stick with the capital/income division – and a minuscule dividend yield – will increasingly find themselves making capital withdrawals – in the form of ann ual charges.