Christine Ross, head of financial planning at SG Hambros, tackles your lump sum investment queries.

Judy Harden asks: "My husband and I are a retired couple who, after our pensions, have a shortfall in income of about �10,000 per year. We have �100,000 to invest but don't want to use up any of the capital. Any suggestions?"

With interest rates at 3.75%, asking for an income (net or gross) of 10% is a tall order, and cannot be achieved without erosion of capital.

Even if you are prepared to risk some of your capital in order to invest in - for example, a high income bond fund, which itself might invest in a variety of corporate bonds (which are effectively loans to companies) - you would be looking at perhaps an income return of 5.5 - 6%.

Your risk would be that the companies keep up the interest payments on the bonds and are able to pay back the loans at maturity.

Before taking any undue risk with your savings, it would be worthwhile taking a look at your expenditure to see if there is any realistic scope to reduce this.

Are there any debts that are charged at a high rate of interest? If so, it would be better to pay these off.

Is there any way of reducing the running costs of your home (e.g. are you entitled to any grants for energy saving home improvements)? In addition, check out your income tax position to see that you are receiving the right income tax allowances (e.g. age allowance).

If you decide to proceed with investments to maximise your income, do take professional advice, emphasising to the adviser that preservation of capital is important.

Ian Ettidge is 75 years old and invests principally in medium and long term gilts at around 8-9% for income.

He is not concerned about loss on redemption as he feels his needs will be less when he is 85 plus, especially as he also has a discretionary will trust.

In the meantime he has a decent income and can always sell if the investment climate changes.

He says his income on redemption will still be 4.5% higher than most current investments but as he hasn't heard of this investment policy being recommended for the elderly, he wants to know if he missing something.

Whilst share values have been plunging, gilts and bonds have generally had a good run. Whilst the income from these remains stable, the capital value fluctuates, generally in the opposite direction to interest rates (although this is not the only determining factor).

Gilts (effectively loans to the UK government) are issued in multiples of �100, but may cost more or less than this depending on demand and the interest rate offered.

With UK interest rates currently at 3.75%, a gilt that pays more than this will cost more than �100 to purchase. However, at maturity only the face value of �100 will be returned to the investor.

This results in a capital loss - but the investor has had value from the higher interest payments. Conversely, when interest rates are high, it is possible to buy gilts with low yields in the market for less than �100 - otherwise known as "below par".

When these mature, the investor makes a capital profit which compensates for the lower income that has been received.

The income from gilts is taxable, although up to �7,000 worth of the investment can be sheltered each year in a stocks and shares ISA.

Profits from gilts that are bought below par are tax free. The only time a problem may arise is if capital is needed at short notice during periods of unfavourable market conditions. However in this case, there are further savings to fall back on.

A viewer asks: "We had a lump sum invested in a 3 year, fixed rate monthly income bond, earning 7.5%, which matured in January.

"Since then the sum has been resting in the best interest rate instant access account we could find, and not doing a lot.

"We need capital security and monthly interest and are prepared to tie up the money long term but it hardly seems worth it with the interest rates currently on offer. Any ideas or advice?"

As you need absolute capital security, cash is king for the time being. Instant access accounts are generally paying the highest rates, especially as some forecasters say that interest rates may fall again before they start to rise.

Shop around for the best rates, which are usually offered by telephone or postal accounts, or those operated over the internet. You can find up to date savings information on the Moneyfacts website

A viewer in York says: "We have a stock market bond maturing in May 2003. It has not done too badly considering, having lost 5% of our original investment four years ago.

"We wish to re-invest and our financial adviser has given us one or two options, but we'd like a broader view on the future of tracker funds or other lump sum plans with the view of perhaps going it alone.

"We have a low to medium view of risk and are looking for capital growth over a five or six-year term. We are thinking of using our Isa allowances, although the amount we have to invest is greater than both our allowances put together. Please could you help?"

You have done pretty well considering overall stock market performance over the last four years. There is nothing wrong with going it alone as long as you are prepared to do the research.

There are a number of issues that you need to consider before you make any investment. First of all, you need to decide the timescale you are able to invest over - not because any investment will necessarily be tied up, but rather because you do not want to have to liquidate assets during unfavourable market conditions.

You should divide your capital into short, medium and long term "pots". Next, you have to consider the level of risk you are prepared to take. You also need to research various investments to ensure they match your risk profile.

Next comes tax. You should make maximum use of your Isa allowances so that investment returns will be tax free, but make sure you use these to shelter the type of tax you actually pay.

For example, most people pay income tax but few are liable to capital gains tax. If this is true in your case, then use your Isas to shelter income producing assets such as cash, gilts and corporate bonds, as these do not have any capital gain.

Shares, including tracker funds and other unit trusts do provide some income, but the bulk of any return is in the form of capital growth. This can be sheltered using your annual capital gains tax allowance (�7,900 for the current tax year). Each tax year you can move a further �7,000 into your Isa, gradually transferring all of your investments into a tax free environment.

Finally, you need to consider the purchasing cost of investments. Many funds have up front charges, which includes commission paid to your adviser, who in turn pays for the advice. If you go direct, most firms will charge you the same price, even though you have not taken any advice.

Many tracker funds have low initial charges and pay little or no commission and there are a number of ways around the initial charge issue. Fund supermarkets available on the internet offer discounted up front charges.

Alternatively, you could tell your adviser that you wish to make your own decisions but ask him to place the investments and return the commission to you in exchange for an administration fee.

Vim Strange asks: "I am retiring in September aged 58 and have 42 years service in a final salary pension scheme. My dilemma is whether to take my lump sum element of approximately �48,000, at the cost of a pension reduction of around �3,400 per annum. Can you offer any advice?"

If your main priority is to receive a regular income, then it appears that you should take the higher pension rather than the lump sum and a reduced pension.

If you express �3,400 as a percentage of �48,000 it's just over 7%. It would not currently be possible to generate a guaranteed return of 7% from an investment of �48,000 without any risk to capital. In addition, your pension is likely to be increased each year to provide some inflation proofing (although it may not be index-linked).

Before making a final decision you should consider whether you have any capital needs - for example, you may need to finish off paying your mortgage or other loan. In this case it may be worth taking at least some of your tax free cash entitlement (you do not need to take all of it). It is also worth remembering that any pension will be subject to income tax.

Derek Briggs asks: "It is nearly five years since I invested more than �50,000 in a with profits bond and in this time I've seen the rates of return drop from over 8% to today's figure of 2.5%. I am aware that once the policy is over five years old, there are no penalty payments to be made for leaving early.

"As a general rule, is it worth considering cashing in the bond, and possibly incurring an exit penalty, then looking for another with profits bond (with a better introductory interest rate) or is there a better type of investment with a reasonable return with the same sort of security afforded by the with profits bond and a monthly income?"

With profits bonds are only really suitable as longer term investments and are designed to smooth out the stock market returns. All with profits bond providers have reduced their bonus payments, this being a reflection of the very poor investment returns experienced in recent years.

As you are aware, exiting this investment now would render you liable to an exit penalty, also known as a market value reduction. Some companies are imposing reductions in excess of 20%. For this reason, moving to another insurance company is unlikely to improve your overall position, even if the current bonus rate is higher.

If you were willing to take on more risk you may gain higher returns, but as you need a regular income I would suggest that you stay with this more stable investment. As your bonus rate has reduced you should ensure that your income withdrawals do not exceed the annual bonus - otherwise you will risk eroding your original capital.

Christine and David Eades from West Sussex ask: "We are planning to move to France within a year. In the meantime, should the proceeds of the sale of our UK house be invested in euros? If yes, will it be in a UK account and how do we go about getting the best return for our euro investment?"

It may be worthwhile investing in euros so that you are not exposed to any sudden fluctuations in the sterling/euro exchange rate. The trade off for investing in euros will be that interest rates will not be particularly attractive - but the added protection from exchange rate risk should outweigh this. Most large banks will offer euro denominated accounts.

Finally, it would be worthwhile taking advice regarding the taxation of your investments before taking up residence in France. There may be advantages to be gained in holding your investments offshore rather than in the UK or France.

One viewer explains: "I have approximately �35,000 to invest, which I want to provide me with a monthly income. I've been given information on a fund that will provide me with a return of 6.25% for 5 years and promises to return the capital in full unless the FTSE 100 falls more than 40% and fails to fully recover.

"Do you think this is a good home for my money? In view of the recent state of the stock market (although I could be wrong), I cannot see it dropping by 40% over the next five years."

I too hope that we will not see further falls, and agree that the risk of a downturn of this magnitude should low. Unfortunately this is what some investors said four years ago, although I accept that market conditions were different.

There have been several versions of this type of bond and I would suggest that if you are tempted, your main focus should be on the worst cast scenario. How much of your capital would be returned to you if the market did fall by 40%?

There is no free lunch, and an income yield of 6.25% is 65% higher than the current Bank of England base rate or 3.75%. To gain this return you will have to take on the associated risk.

Another viewer says: "I shall be receiving a �10,000 lump sum as part of my pension payment in August when I will be 60 years old. Also, in December I shall be receiving around �60,000 when my life insurance policy matures.

Can you advise what I should do with this money (investments etc.), although not long term as I want to use some for holidays during our retirement.

I rather like the idea of buying a painting for about �10,000, but my son advises me against this as I know nothing about the art world. I've also thought about buying �20,000 worth of premium bonds, as it's easy to access my money should I need it."

Any capital that needs to be accessible should really be held in cash or short term secure investments. The first port of call should be a high interest account. Keep an eye of the rates - accounts operated by phone, post or via the internet tend to pay the best rates.

If you have not used your Isa allowance you can open a mini cash Isa with up to �3,000 and the interest earned will be tax free.

Premium bonds are a good idea. Whilst you are not guaranteed to receive any return, your capital is safe and accessible. As far as the purchase of a painting is concerned, I assume you would consider this more for enjoyment as opposed to capital appreciation. Art is not a liquid investment and prices can be volatile, so I would suggest you only commit money that you can afford to leave tied up.

Unless you plan spending all of your capital during the next few years, you may want to consider investing some for the longer term, perhaps to provide you with some extra income at a future date. However, before entering into any longer term investments you should establish exactly how much is required for expenditure during the short to medium term.