One of the main benefits of ISAs compared to pensions is that any withdrawals are tax free, whereas 75% of pension withdrawals are taxed as income.  ISAs are therefore the ideal home for income producing investments because any dividends or interest payments are tax free within the ISA and no tax is due when money is withdrawn.

ISAs and their predecessor Personal Equity Plans (PEPs), have been around since the mid 80s and the annual contribution allowance is now a very attractive £20,000 so it is possible to build up substantial portfolios in ISAs.

For example, we have around 20 ISA millionaires on our platform and hundreds of customers who have ISA portfolios worth over £500,000.  If an investor with a £500,000 ISA portfolio could construct their investments so that they yield 4% a year (which is roughly what the FTSE 100 currently yields) they would have a very healthy annual income of £20,000 completely tax free, without even eating into the capital value of their investments.

One way of achieving this is to look at equity income funds which invest predominantly in dividend paying companies.

The UK market is a mature dividend paying market and therefore remains a solid choice for income seekers. While the largest few funds in the sector have historically taken the bulk of assets, some strong choices exist if you look a little further afield. The Evenlode Income fund for example is run by Hugh Yarrow who is an experienced manager and with a focus on companies that generate good levels of cash and can grow their dividends, this diversified portfolio will be a good foil to other better known equity income funds.

However, many opportunities also now exist away from the UK. Investing globally offers access to a huge range of dividend paying companies and will also compliment an existing holding in a traditional UK equity income fund.

Artemis Global Income is a global equity fund that looks to outperform the MSCI AC World Index over time and is focused on delivering both a rising income and capital growth. The fund operates in a totally unconstrained manner meaning that positioning both on a geographical and sector basis can move around significantly. Manager Jacob de Tusch Lec looks to blend a strong bottom up focus with a top down macro view of the world and is looking for companies that offer a strong free cash flow yield where dividend payment and dividend growth are a strong part of the company valuation.

The fund typically consists of a well-diversified range of companies with between 80-100 names and to ensure diversification, there are limits of 5% at an individual stock level while each industry weight is limited to 15%. The manager thinks of the portfolio in three distinct areas with 40-60% of the fund allocated to core positions that have a good yield but are seen as lower risk, 20-40% in growth companies that offer a high level of dividend growth while 10-30% is reserved for special situations. Overall, the fund offers a pragmatic approach to investing across the world and benefits from an experienced manager who has run a wide range of different investment strategies.

Ryan Hughes is head of active portfolios at AJ Bell