A FEW years ago, Ken Ferguson had bought a high income bond paying 10 per cent per annum, with any capital return reliant on the stockmarket not falling over the term. He telephoned, not because he was unhappy with the product but because he was thinking ahead knowing that his 10 per cent income would be stopping in the not too distant future. Ten per cent income is a bit of a magic figure and a level of income that most investors have been used to for a number of years. With interest rates falling, many clients face a bit of a shock when looking to reinvest their money. "What I am looking for," said Ken Ferguson, "is a product that will pay me 10 per cent net income each year with little risk to the capital.""I am sorry, but I am going to have to disappoint you," I said. "That rate of return on that type of product simply does not exist anymore."Ken said that he had never considered how the falling bank rate would affect some investment products. "Unfortunately," I explained, "they are all interlinked to a greater or lesser degree.""So what options are open if there is not an identical product for me to go back to?" Ken asked.I said: "Like all investment decisions, generating income is a question of risk versus return Take risk-free investments with building societies.

They are unlikely to offer more than 6.5 per cent gross at present, and as you are a taxpayer you will be liable to income tax. Interest rates are likely to fall further, and consequently the return on the building society will also reduce.""That doesn't sound too attractive," replied Ken "What about Tessas?""Well, they are worth looking at. Although the rates will fluctuate they tend to offer more than a building society, and as it is sensible to keep money in the building society for emergencies it is worth considering putting some of that money in a Tessa. The advantage of the Tessa is that interest is paid tax free."If we move slightly up the risk profile, you could consider a with-profit bond, such as the Prudential or Scottish Widows, and these will pay you 5.75 per cent and 6.75 per cent net reversionary bonuses at present. But it's still not as good as you are used to.""Don't these tie me in for a long time?" enquired Ken."To an extent; but you have to realise that they are designed for the longer term - and that has to be at least five years.

Historically with- profit bonds have given very comfortable returns; not exciting but very steady and reliable."Ken Ferguson said that the drop in income from these investments would prove a problem after being used to 10 per cent."If you want a higher income the only option is to go further up the risk scale. Perhaps you should consider a corporate bond fund, such as the M&G High Yield Bond which has a gross yield of 7.85 per cent or the Aberdeen Fixed Interest Fund which yields 8.5 per cent gross, both of which can go into a PEP. If you cannot PEP them then obviously you are liable to tax, which brings their returns down to that offered by with- profit bonds.""Is there nothing that pays 10 per cent or more?" asked Ken."There is a class of share issued by split investment trusts which benefit from all of the income that trust generates," I began. "These are really quite high-risk geared investments, meaning that they exaggerate market movements in both an upward and downward direction."The new CGU Monthly High Income investment trust is producing over 10 per cent and soon to be launched the Jupiter Enhanced Income investment trust aim to pay 10.25 per cent gross. They are not the most straightforward investments, and you should limit exposure to a small part of your portfolio.""So my choices are: accept that I'll get a lower income, or increase my risk?""Correct," I said.After a couple of days to think it over, Ken requested a prudent strategy, and I recommended a diversified selection of investments maximising his tax benefits through Tessas and Corporate Bond PEPs. Like many investors, he has had to lower his expectations of the returns from income investments.Tim Cockerill is the managing director at Whitechurch Securities, independent financial advisers (0800 374413).

It is not often that tax policies of other countries form the lead story in the UK media. But a sense of proportion needs to be brought to the furore over EU tax harmonisation that has dominated the run-up to this weekend's introduction of the euro. First of all, what does harmonisation mean? People seem to assume that equalising the corporate tax rates means companies would pay the same tax in each state. This is a gross oversimplification, as the tax bases - the underlying system of calculating the profits on which companies pay their tax - would remain very different in each country. To date there has been minimal progress in harmonising the direct tax systems of the EU's member states. In the early Nineties, the European Commission brought forward a number of directives designed to facilitate the operation of the single market and reduce double taxation - that is where companies end up paying tax twice on the same profits. Just two of these proposed directives were approved - the parent/subsidiary directive that reduces taxation on dividends, and the mergers directive which facilitates cross- border reorganisations, disposals and acquisitions.

Other proposals for directives were dropped as it was not possible to reach agreement between all the member states.More recently, as member states focus on protecting their tax revenues, the Commission has found a more receptive audience to its exhortations to co-ordinate tax policy. France and Germany, in particular, have been concerned to prevent companies establishing themselves in tax havens and reducing the tax payable at home. EU Tax Commissioner Mario Monti - who has taken a much more cautious approach to the whole subject than the German and French governments - has said: "If you create a tax haven for a few people, you condemn the rest to a tax hell." As a result, in December 1997 EU Finance Ministers reached an agreement on a package of measures intended to combat harmful tax competition between member states.The package consisted of these three elements:A code of conduct for business taxation.A proposal for a directive on interest and royalties.A proposal for a directive on the taxation of interest income from savings - the savings directive.The first, the code of conduct is perhaps the most interesting element of the package: it is designed to prevent "harmful tax competition" within the EU by encouraging member states to withdraw special tax regimes. These aim to attract businesses that are internationally mobile without affecting the general rate of business tax in the country. For example, in a country with a headline rate of tax of 40 per cent, a regime that offered a 10 per cent rate of tax to financing activities might be harmful in this context, especially if it applied only to foreign companies or foreign income.The working party established under the code of conduct - chaired by the UK's own Dawn Primarolo [Financial Secretary at the Treasury, and MP for Bristol South] - has now identified 82 low-tax arrangements for businesses within the EU which might be harmful.