‘Can I go part-time now and still afford to retire later?’

Jules is 56, runs a film company and is studying for a master’s degree. He has a child at university to whom he gives £3,000 a year to help cover living costs, and will do this for another two-and-a-half years.

Jules’ home is worth about £500,000 and is mortgage-free. He also owns half of a piece of land with a value of about £100,000.

“I do not intend to retire and hope to make films into old age – at least part-time,” says Jules. “However, this industry is notoriously volatile so for the past few years I have supported my income with my investments – I currently take about £10,000 a year from them. I now aim to get a job in a more stable sector, ideally part-time, and pursue my film ambitions alongside it. I hope to get a job that pays £40,000 to £50,000 a year, as I need income of at least £25,000 a year to cover my annual expenditure. But, ideally, I would like to earn at least £40,000 so that I can stop drawing from my investments and grow the pot. When I am retired, I aim to squeeze as much out of the investments as I can.

“I would like to leave my home, motorbikes and intellectual property to my child – some of my work has created a lot of value and hopefully some of my new work will also make a lot of money.

“I have two personal pensions worth about £55,000, and an individual savings account (Isa) that my wealth manager runs with an income objective. Initial investment amounts in this account are between £2,750 and £3,000 but some are now worth less because they have fallen in value. My wealth manager also runs my business’s investment account.

“I manage my general investment account myself though hardly ever touch these investments, which I received as part of an inheritance. I am not very interested in or good at studying markets, and numbers phase me. But an increasing number of commentators are guiding that we are perhaps approaching or close to a pivot point so could see some recovery in many of the holdings, at which point there could be a case for looking at things with fresh eyes.”

 

Jules’ portfolio
Holding	Value (£)	% of the portfolio
Wealth manager Isa*	137,838	26.81
Land	100,000	19.45
Business investment account**	66,669	12.97
Cash	45,628	8.87
Personal pensions	54,863	10.67
Business cash	17,000	3.31
Templeton Emerging Markets Investment Trust (TEM)	9,753	1.9
SSE (SSE)	9,450	1.84
BAE Systems (BA.)	7,364	1.43
Compass (CPG)	7,353	1.43
BP (BP.)	7,156	1.39
GSK (GSK)	7,055	1.37
BHP (BHP)	6,386	1.24
Finsbury Growth & Income Trust (FGT)	5,673	1.1
Renewables Infrastructure (TRIG)	5,562	1.08
Barclays (BARC)	4,646	0.90
M&G Recovery ( GB00B4X1L373)	4,290	0.83
Vodafone (VOD)	3,908	0.76
J Sainsbury (SBRY)	3,840	0.75
Prudential (PRU)	3,080	0.6
abrdn Equity Income Trust (AEI)	2,278	0.44
Haleon (HLN)	1,820	0.35
Legal & General (LGEN)	1,313	0.26
Woodside Energy (WDS)	982	0.19
Jackson Financial (US:JXN)	224	0.04
Total	514,130
See pie chart. **Business investment account is invested in Royal London Sterling Credit (GB00B4W1ZT22), TwentyFour Income Fund (TFIF), Jupiter Strategic Bond (GB00BN8T5596), abrdn Global Inflation-Linked Bond (GB00B4PPHB71), CT Select UK Equity Income (GB00BMY8DX76), Artemis Income (GB00B2PLJJ36), BlackRock European Dynamic (GB00BCZRNM23), IInternational Public Partnerships (INPP) and cash.

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR’S CIRCUMSTANCES.

 

Tom Hopkins, portfolio manager at BRI Wealth Management

Your personal cash balance of around £45,000 more than covers 12 months of annual expenditure (£25,000), including the money you give to your child, plus enough cash for emergencies.

Although you say that you are “not very interested in or good at studying markets”, despite the apparent lack of intervention your general investment account, which has a value of about £88,000, performed well in 2022 and has returned around 4.5 per cent due to the majority exposure to multinational FTSE 100 companies. By contrast, last year the US market fell 18.5 per cent. However, the lack of active management is clear, given the small holdings in Haleon (HLN) and Jackson Financial (US:JXN), which have been accredited through demergers, and this account’s stock-specific risk is high.

We would combine your general investment account and stand-alone holding in M&G Recovery (GB00B4X1L373) with your Isa and business investment account portfolios. This would take the value from around £202,000 to £294,000 and, if it continued to be invested with an income objective, create an annual investment income of approximately £12,500. This would comfortably exceed the £10,000 you have been drawing from them each year, excluding any tax. And when you start your new job you could change the investment objective to a capital accumulation growth strategy to grow the pot.

Make use of your tax-free allowances. Ensure that your wealth manager can transfer funds from your investment account to the Isa annually, and make use of the annual capital gains tax (CGT) and Isa allowances. We suggest prioritising high-yielding investments for transfer into the Isa to minimise tax accruing from your trading account. Taking money from your Isa does not incur CGT and income tax.

You don’t have a self-invested personal pension (Sipp) and could have unused pension allowances. If a particular tax year’s pension annual allowance isn’t fully used, it can be carried forward for up to three years, although you must have the relevant earnings to match the total contributions to use this. Your business could make contributions to a Sipp if it has surplus cash, and you could consolidate your personal pensions into the Sipp.

You own land worth £100,000. If this produces income, ie generates a rental yield, it could be transferred into a Sipp as a pension contribution in place of a cash lump sum and the income then generated would be tax-free. If the land doesn’t produce income, you could sell it, subject to CGT, and transfer the proceeds into a Sipp to use up any unused pension allowances, if your earnings in that year are as much as the contributions. When this money is in the Sipp it would benefit from tax relief.

You could access assets in a Sipp as you are over the age of 55. A Sipp would also fall outside your estate when you die, meaning that it would not be subject to inheritance tax (IHT) and could be received by named beneficiaries.

At age 67, you will also be eligible to claim the state pension but need to make 35 years of National Insurance contributions to qualify for it in full.

 

Tom Kimche, senior client adviser at Netwealth, says:

You have sufficient funds for your immediate expenditure as you have over six months’ worth of expenses as cash. But as your future income is uncertain, you may wish to consider holding more.

Currently, your withdrawals of £10,000 a year equate to around 3 per cent of the value of your investments, excluding cash, which is likely to be sustainable. When you recommence work and stop withdrawals, it would be a good time to review and consider investing surplus cash, ideally within pensions and Isas.

The sequencing of withdrawals is important for long-term tax efficiency. When supplementing your income, drawing from your non-tax-privileged accounts first should increase the longevity of the portfolios. Doing this would also help to leave an inheritance for your child because funds in pensions are free from IHT.

Excluding the investments in your pensions, around 82 per cent of your investments are in equities; 6 per cent in alternatives, the majority of which is property, and 12 per cent in fixed income. 

Asset allocation is the most important factor when considering return potential, and your equity exposure is appropriate for an adventurous long-term investor. However, a high equity allocation means greater volatility than that of a portfolio balanced more towards fixed-income assets.

Within the equity allocation, your highest exposures are to the UK and the US at around 51 per cent and 10 per cent, respectively. But you also have small allocations to Asia Pacific, emerging markets, Europe and Japan. It’s important to diversify and consider correlation so that if a holding suffers a large fall in price, the impact on your portfolio is limited and other holdings offer the potential for offsetting the loss. Each area of the market behaves in a different way over time, but it is difficult to know in advance which area will perform best or which will perform poorly, such as US tech last year.

Your property allocation is UK-focused so your total exposure to the UK is close to 60 per cent, which is high, although it is common for investors to have a degree of home bias. UK equities and property are likely to perform in a similar fashion to each other when the economy does badly. Demand for commercial property goes down and vacancy rates go up, reducing capital growth and rental yields. This happened during the pandemic and it has not yet recovered fully, and many commercial property funds suspended trading and were wound up. Also, your main residence and the land you hold are UK-based, so you are highly exposed to the fortunes of the UK economy. 

If you don’t need to generate additional income when you start to work and as you don’t plan to fully retire, it may be appropriate at this stage to review your asset allocation, including geographical exposure. Equity will be the primary driver of growth and risk over the long term. The suitability of increasing risk, though, will depend on your long-term income needs and also how you feel about risk, ie whether you are comfortable with higher volatility or would prefer less volatility. Financial advice can assist with making this decision.

You could consolidate your two pensions for administrative simplicity, and to help manage your overall investment and tax-efficient drawdown strategy. Moving your other assets to the same platform would also help with this.

Keeping costs down is important, but the majority of active fund managers underperform the market over time while charging higher fees. In any one year, an active fund might perform exceptionally, however that performance is often not sustained. Evidence suggests that passive exposure to the market outperforms stockpicking over the long term, on average, with lower costs [eating into fewer of your returns].