The continuing trend of low interest rates has highlighted a number of problems for investors which had previously not been faced for a number of years.One of the greatest difficulties is to produce a competitive income stream from a lump sum investment while keeping the original capital outlay intact.

Combined with this problem is the need to find a tax efficient investment vehicle which provides an acceptable level of security.Initially, unit trusts may be considered since they provide some distinct tax advantages.

Capital gains tax is not payable until units are encashed, and income received in the form of dividends can be passed on to unit holders without payment of advance corporation tax and without liability to corporation tax in the hands of the trust.

They are also suitable for offshore trusts which can be structured to benefit from their tax advantages.In contrast, the danger in using equity based unit trusts is the volatility in the underlying shares.

This is one reason why many investors prefer to consider other products which provide greater security in the short term.Investment bonds are an ideal way to generate an income and also provide the opportunity for capital appreciation.

The most suitable of these are distribution bonds and with profit bonds, which offer investors a halfway house between cash deposits and equity investments.

Although tax at 25% is paid within the fund, the security which these bonds offer is more than adequate compensation.Distribution bonds are offered by insurance companies and have proved extremely popular over the last year or two, competing well with rates available from cash deposits.

Ori ginally marketed by Sun Life in 1979, the structure of this bond has now been adopted by other companies which have recognised its potential popularity.Distribution bonds aim to yield an increasing income of up to 5% per annum and also provide the possibility of capital growth.

The underlying investments are in equities, fixed interest stocks, convertibles, index linked gilts and cash - the income from which is passed on to bondholders either monthly, quarterly or, more commonly, half yearly.The advantages of these bonds are threefold.

First, the bond is designed so that the fund managers invest in a conservative manner to produce a steady rather than spectacular return.

This provides a large degree of security for the risk-averse investor.

However, equities held within the bond can fall in value as well as rise.Secondly, there are a number of tax advantages.

Up to 5% income can be taken each year for up to 20 years, with the potential tax liability being deferred.

It is possible to withdraw more than 5% income each year, but the excess will be subject to income tax at the difference between the higher and basic rate.

One way to avoid this is to carry forward any unused 5%, or parts thereof, from previous years.

Higher rate taxpayers who are approaching retirement can also save tax by encashing the bond once they have stopped work.

By that time, they may be basic rate taxpayers and will not be liable to a tax charge on the gains within the bond.

Elderly investors benefit further in that the income does not form part of their taxable income.Thirdly, although the value of the bond is not guaranteed, the investment strategy may be sufficient not only to produce some capital growth, but also to provide a steadily rising income.

There are not many forms of investment which can match all of these advantages.An alternative to distribution bonds are with profit bonds.

These provide terminal bonuses as well as an annual bonus which can never be taken away.

Although bonus rates have fallen in recent years due to lower investment performance, the returns are still over and above those currently obtainable from bank and building society accounts.With profits funds are run by insurance companies and are traditionally more stable and secure than pure unit linked investment funds.

The managers primarily invest in UK and international equities, property, and fixed interest securities.

The risk profile is low and the funds aim to provide stable returns, smoothing out the fluctuations in underlying stock market movements.Both distribution and with profits bonds should be held for a minimum of five years to avoid early surrender penalties, and the effect of initial charges.

Any emergency capital should not be tied up in this way.

They are not a direct alternative to cash deposits since access is restricted and values not guaranteed.

Additionally, some companies may reserve the right to impose a market value adjustment (MVA) if with profit bonds are encashed during a stock market low.

This is not usually applied to bonds held for longer than five years, but may be relevant to younger bonds.Again, up to 5% income can be taken immediately from a with profit bond without incurring a tax charge and the gains are subject to higher rate tax in the same way that distribution bonds are.Current bonus rates are in the region of 7% and there is stiff competition between the product providers to offer the highest rates in order to attract funds.

Most make an initial charge of 5% and there are different allocation rates depending upon the amoun t to be invested.

A leading product provider is the Prudential, whose Prudence Bond is arguably the market leader, attracting funds of £1.6 billion since April 1991.

The minimum investment is currently £6000.When planning a large investment, it may be beneficial to ask an adviser about special terms or rebates of commission over and above an agreed fee.

An adviser may also be in a position to negotiate extra allocation rates for clients with large sums to invest.Investments in both of these bonds can be segmented.

Thus a large bond can be split into several parts which enables encashment of only a proportion of the total holding.

The ability to raise capital from bonds in this way can help facilitate funding for school fees, for example, or other forms of payment which require staggered funding, such as maintenance payments.