Was last year the end of easy era for income investors?

Once upon a time, there was a little (rental) house in a wood. And the rental yield on that was 8%. And the interest on the mortgage was tax-deductible.

And Mummy Bear's ISA held the top-selling Invesco Perpetual Income fund, which paid out more than 4% a year. And higher-rate taxpaying Daddy Bear got a "free" £200 for every £800 he paid into a pension, claiming a further £200 back on his tax return. No, children. Mummy is not making it up. Those were the income glory days.

In his Autumn Statement last November, the chancellor put the boot into buy-to-let landlords and all the "grockels" who annoy local Cornish folk with their holiday homes.

With one fell swoop of his fiscal sword, he sliced the potential gains from direct property investments, adding an extra 3% to stamp duty on investment properties and second homes.

Earlier in 2015, after the Budget, interest on buy-to-let mortgages ceased to be tax-deductible, meaning that those properties with mortgage costs of more than about 75% of rental income became loss-making.

And now, not only will new potential landlords pay 3% more on acquisitions but they will also have to stump up the capital gains tax due on the profits from any sale in just 30 days. Ouch. That all looks a lot less attractive.

Income investors abandon rental property

Our sister magazine Money Observer surveyed 1,000 adults the day after the Budget, and asked them how this had affected future plans to invest in property. Unsurprisingly, the changes had most impact in the pricey capital: 39% of Londoners said it would make them rethink future property investment plans.

Since I can remember, the investment industry has resented the property boomAcross the country as a whole, 22% of all adults said that yes, this would change future plans to invest in property; and it was the 35-55 age group who were most likely to be having second thoughts.

Ever since I can remember, the investment industry has resented the property boom, wringing its hands and preaching diversification to that disaffected group of real estate investors who have understandably preferred to save for their retirement in assets they can touch and understand, and for which they know all relevant charges.

Arguably, the industry has only itself to blame for being so awful at explaining investments to its customers and telling them what everything costs. But I digress.

Looking ahead, Jason Hollands, managing director of communications at Tilney Bestinvest, tells me he still expects to see a "starry-eyed attachment" to property for people who "have never known anything other than relentless rises in prices, so assume the laws of gravity simply don't apply".

He told me of a meeting this week with a smart woman, who worked in finance and was keen to acquire a buy-to-let.

"Five minutes earlier she had talked about how silly house prices had become in London and how all this was exacerbated by easy money policies. I pointed out the recent changes, and she just shrugged her shoulders and said 'property always does well'."

So what alternatives are there for those income-seekers who may now feel less positive about property?

ISAs and SIPPs soak up deposit cash

In December (just a week after the Autumn Statement) I touched base with five leading investment platforms, who reported a modest increase in calls and activity from existing clients who had decided to reallocate cash savings earmarked for a buy-to-let deposit.

There are dissenting industry views on what will happen to pension tax reliefThey planned to give up on the property idea and invest instead in the stockmarket via a general investment account, ISA or self-invested personal pension (SIPP).

And, If you have had a change of heart, it's arguably sensible for higher-rate and top-rate taxpayers to look at pensions before 5 April, as there is the shadow of a "last chance saloon" sign hanging above the door.

For starters, from April 2016, those earning more than £150,000 will have their tax relief on pension contributions tapered down. There are also dissenting views in the industry about what will happen to pension tax relief. Some anticipate a single rate of tax relief, which will be less than higher-rate tax.

So for example, if you contribute £800 today (and you pay 40% tax), the government chips in £200 and you can claim back £200 on your tax return. After April, the amount you can claim back could be considerably less.

I had coffee recently with someone from the chancellor's inner sanctum, who whispered that several bigwigs see pensions as an irrevocably tainted brand; they want them sent to the dungeons of history and all upfront relief done away with. We shall see come 16 March, when the red briefcase is wheeled out again.

Best alternatives for income-seekers

First, the gap in direct residential property investing is unlikely to be filled by flows into property funds. These funds are different beasts, which own commercial properties - office blocks, warehouses and shopping centres - and deliver returns to investors based on the reliable rental income from businesses.

Buy-to-let's heir is the equity income fund, but these are under the cosh tooThe big players in the commercial property market are pension schemes, insurance companies and sovereign wealth funds, which buy big chunky buildings for income.

If we take a clinical look at the returns on residential property, by the time the plumbers, sparks, rental agent and decorator have been paid, any empty periods factored in and the mortgage discharged, many of us are probably pulling wool over our eyes about precisely how much we're making. Is this a clinical income play - or a way of "getting an asset for free"?

The heir apparent from buy-to-let is probably the equity income fund. But these are under the cosh too.

A few days after the Autumn Statement, Invesco's Mark Barnett, manager of the perennially popular Invesco Perpetual Income fund, reined in investor expectations about future dividend payments.

Over the past few years, he said, dividends have been growing quicker than earnings and the "payout ratio" (the percentage of companies' earnings paid out as dividends) of the FTSE All-Share index has jumped to a 20-year high.

The quest for income may be the most pressing issue investors address in 2016Barnett told a group of advisers that unless they believe "that line is going to continue to go north, which I do not believe, what we're looking at is a period of time when earnings and dividends are going to grow much more in line...which certainly would be a slower rate of growth than what we've seen in the last few years. And if my earnings growth outlook for next year is around 3% or 4%, then dividends should grow approximately in line with that".

Will we look back on 2015 as the end of an easy era for income seekers? A time when buy-to-let boomed, many income funds had yields of 4%-plus, and tax relief on pensions was plentiful for top earners?

The quest for income will arguably be the most pressing issue that investors need to address in 2016, and I expect to see some over-engineered solutions appearing to try and resolve the (perhaps temporarily) unresolvable.

Top fund picks in the income sector

Artemis Income remains possibly the most consistent favourite of the fund selectors I chat to; they point to the manager's superior stock-picking skills and a strong emphasis on cash generation. Current yield is 3.8%.

Tilney Bestinvest's top pick is the Threadneedle UK Equity Income fund, which currently yields 4.2%. If you want a multi-cap approach, then look at the Standard Life UK Equity Income Unconstrained fund, with a 3.9% yield.

M&G Optimal Income can divide opinion but remains popular with many. It's run on a total return basis, which means the manager has more flexibility than most and can use bonds, derivatives and shares.

Looking overseas, Newton Global Income fund sits on many platforms' preferred lists. This fund's yield is 3.7%. JPMorgan Emerging Markets Income currently has a yield of around 4.9% and is a riskier long-term income play in what is a rather unloved sector right now.

And finally if you're after a property fund, Henderson UK Property remains a best seller. It's mainly invested in South East England and yields 3.4%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.