5pc tax-free income a year: UK’s two ‘most viewed’ Isas beat every savings account | Personal Finance | Finance

London’s index of top blue-chip stocks has rocketed more than 15 percent since 13 October, as investors anticipate a better year for stock markets.

This has added more than £300billion to UK share values, and reversed some of the losses that Isa investors and retirees who put their pension savings into drawdown suffered last year.

It will come as massive relief after a tough 2022 for shares, which saw some global stock markets such as the New York Nasdaq technology index fall by a third. 

Two investment funds that invest primarily in stocks listed on the FTSE 100 have been popular for years, and are now getting more attention than ever.

As well as giving investors capital growth when markets rise, they pay generous income from company dividends.

Both funds have an incredible track record of increasing their income every single year, stretching back decades.

Over the last decade, they have doubled investors’ money. These returns are free of income tax and capital gains tax for those who invest inside their annual £20,000 Isa allowance.

As interest rates on savings accounts and cash Isas peak, with three-year bonds stalled at around 4.25 percent, they could provide superior option for investors who are willing to take on the added risk of investing in shares.

Both funds are investment trusts, which are quoted on the stock market but whose business is investing in other companies.

City of London Investment Trust has been rated highly by investors for decades, and was the most viewed company online last year, according to figures from the Association of Investment companies (AIC).

It invests in the UK equity income sector and has consistently increased its annual dividend for longer than any other UK fund.

Incredibly, City of London has hiked its dividend every year for the last 56 years, including when markets crashed in 1987, 2000, 2008 and 2022.

It does this by holding back income and profit in the good years, and paying out when the going gets tough.

Around 80 percent of the fund is invested in UK companies, notably FTSE 100 dividend stocks British American Tobacco, Shell, Diageo, BAE Systems, BP and AstraZeneca.

City of London manages total assets of more than £2billion and delivered a total return of 9.37 percent in 2022, including dividends and share price growth. 

That is a strong performance given the war in Ukraine, Covid lockdowns in China, rocketing inflation and rising interest rates.

Over the long run, it is even more impressive. City of London has delivered a total return of 19.3 percent over five years and 98.1 percent over 10 years, effectively doubling long-term investors’ money.

Its current yield is 4.87 percent, which beats any UK savings account.

READ MORE: ‘World beating’ Isa savings option yields 6.6% with more to come

Another popular fund that operates in the UK Equity Income sector, Merchants Trust, has a similarly impressive track record.

It has increased its annual dividend every year for 40 years and currently offer investors an income yield of 4.88 percent a year.

This fund is 95 percent invested in UK shares, and has some crossover with City of London, as its two largest holdings are Shell and British American Tobacco.

It also invests in BP, cigarette maker Imperial Brands, Rio Tinto and other FTSE 100 stalwarts.

Merchants’ total return is even more impressive.

Over five years it has returned 49.2 percent and a hugely impressive 144.1 percent over a decade.

As always, past performance is no guarantee of future returns and both funds are riskier than putting money in cash.

Investor should only buy these trusts if they are willing to hold them for at least five years, and ideally much longer, to overcome short-term volatility.

Dividends are not guaranteed as companies are free to cut them at any time. However, by investing in a range of different stocks, these trusts spread the risk.

There is no guarantee the FTSE 100 will continue to climb, but in the long run the stock market should make your money work harder than if it was left in the bank.