- These investors need to consider how their outstanding mortgage will impact their retirement income
- They should reduce their number of holdings
- They should consider if they could achieve their objective without taking as much risk
Reader Portfolio
Martin and his wife
68
Description
Pensions, Isa and general investment account invested in direct share holdings and funds, cash, residential property.
Objectives
Retire in April 2023 on annual income of £35,000 a year, draw from pensions tax efficiently, leave assets to wife.
Portfolio type
Investing for income
Martin is age 68 and earns £18,500 a year. He also receives a state pension of £10,379 a year and a defined benefit (DB) pension which pays out £136.51 a month.
His wife is self employed, works part time and earns around £10,000 a year. She also receives a state pension of about £9,000 a year.
Their home is worth about £650,000 and has a mortgage of £180,000.
“I will retire in April 2023,” says Martin. “From that time, I would like an income of around £35,000 a year from sources including my self-invested personal pension (Sipp) which I will draw from via flexible access drawdown or uncrystallised funds pension lump sums. I currently contribute 3 per cent of my salary to the Sipp and my employer contributes equivalent to 5 per cent of my salary to it, but these contributions will stop in April next year. I have not yet accessed this pension.
“My wife is also due to retire but will still receive income of around £4,000 a year. I would like her to inherit my investments.
“My investments are invested for growth and income, although I currently reinvest the dividends. So I could tolerate the capital value of my investments declining, as long as they maintain the level of income they pay out.
“I have been self managing my investments for seven years and have tried to invest in shares which have fallen in value, although this approach has not worked out with some of them. Recent examples of investments I have added to the portfolio include Haleon (HLN), Baillie Gifford US Growth Trust (USA) and ITM Power (ITM).
“I now plan to sell some of my existing holdings and reinvest in Diageo (DGE), Glencore (GLEN), Phoenix (PHNX), Primary Health Properties (PHP) and Severn Trent (SVT).”
| Holding | Value (£) | % of the portfolio |
| Lowland Investment Company (LWI) | 45,000 | 7.14 |
| NS&I Premium Bonds | 40,000 | 6.35 |
| WisdomTree Japan SmallCap Dividend Fund (US:DFJ) | 35,000 | 5.56 |
| Vanguard FTSE 100 UCITS ETF (VUKE) | 30,500 | 4.84 |
| Tritax Big Box REIT (BBOX) | 30,000 | 4.76 |
| iShares FTSE 250 UCITS ETF (MIDD) | 27,000 | 4.29 |
| Cash | 25,000 | 3.97 |
| Worldwide Healthcare Trust (WWH) | 25,000 | 3.97 |
| Ashtead (AHT) | 23,000 | 3.65 |
| Lloyds Banking (LLOY) | 22,000 | 3.49 |
| Baillie Gifford US Growth Trust (USA) | 17,500 | 2.78 |
| iShares MSCI Europe ex-UK UCITS ETF (IEUX) | 16,500 | 2.62 |
| Herald Investment Trust (HRI) | 16,000 | 2.54 |
| WisdomTree Europe SmallCap Dividend UCITS ETF (DFE) | 16,000 | 2.54 |
| WisdomTree Physical Gold (PHAU) | 15,500 | 2.46 |
| AstraZeneca (AZN) | 14,500 | 2.3 |
| Kin and Carta (KCT) | 14,000 | 2.22 |
| iShares Residential and Multisector Real Estate ETF (US:REZ) | 13,500 | 2.14 |
| iShares U.S. Home Construction ETF (US:ITB) | 12,500 | 1.98 |
| iShares MSCI Brazil ETF (US:EWZ) | 12,000 | 1.9 |
| OSB (OSB) | 12,000 | 1.9 |
| GSK (GSK) | 11,000 | 1.75 |
| Shell (SHEL) | 10,500 | 1.67 |
| Sun Life Financial (CA:SLF) | 10,000 | 1.59 |
| Natwest (NWG) | 9,000 | 1.43 |
| Clarkson (CKN) | 8,000 | 1.27 |
| National Grid (NG.) | 8,000 | 1.27 |
| Redrow (RDW) | 7,000 | 1.11 |
| Santander UK 10.375% Non Cum PRF SHS GBP1 (SAN) | 7,000 | 1.11 |
| Tesco (TSCO) | 7,000 | 1.11 |
| Persimmon (PSN) | 6,500 | 1.03 |
| Abrdn Japan Investment Trust (AJIT) | 6,000 | 0.95 |
| Bellway (BWY) | 6,000 | 0.95 |
| BT (BT.A) | 6,000 | 0.95 |
| QinetiQ (QQ.) | 6,000 | 0.95 |
| HSBC (HSBA) | 5,500 | 0.87 |
| Barratt Developments (BDEV) | 5,000 | 0.79 |
| SPDR Gold Shares (US:GLD) | 5,000 | 0.79 |
| Taylor Wimpey (TW.) | 4,500 | 0.71 |
| Petrofac (PFC) | 4,000 | 0.63 |
| WisdomTree Japan Hedged Equity Fund (US:DXJ) | 4,000 | 0.63 |
| Vodafone (VOD) | 3,500 | 0.56 |
| XPS Pensions (XPS) | 3,500 | 0.56 |
| Crest Nicholson (CRST) | 3000 | 0.48 |
| Haleon (HLN) | 3,000 | 0.48 |
| Lookers (LOOK) | 3,000 | 0.48 |
| iShares FTSE MIB UCITS ETF (IMIB) | 2,500 | 0.40 |
| KraneShares CSI China Internet ETF (KWEB) | 2,000 | 0.32 |
| International Distributions Services (IDS) | 2,000 | 0.32 |
| ITM Power (ITM) | 2,000 | 0.32 |
| Tharisa (THS) | 2,000 | 0.32 |
| Lyxor MSCI Greece UCITS ETF (FR:GRE) | 1,500 | 0.24 |
| Swedbank (SE:SWED) | 1,500 | 0.24 |
| Capita (CPI) | 1,000 | 0.16 |
| Schroder UK Public Private Trust (SUPP) | 1,000 | 0.16 |
| Total | 630,000 |
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS’ CIRCUMSTANCES.
Keith Bowman, investment analyst at interactive investor, says:
The importance of planning, organising and accumulating assets with which you can hopefully enjoy a comfortable retirement cannot be overstated.
You want an income of £35,000 a year from April 2023, but as you already receive a state and private pension you only need to generate a further £23,000 to meet this target.
You still have a mortgage of about £180,000 – what type of mortgage is this and will it influence your planning going forward? Is it an equity release loan that doesn’t require monthly payments and will be repaid when your property is eventually sold, for example, a retirement interest only loan? Or do you make capital and interest repayments, or interest only repayments on a monthly basis? Also, does your target income of £35,000 a year take into consideration further mortgage repayments?
If you plan to pay off some of your outstanding mortgage balance using your pension, if when you do this your Sipp has a value of, say, about £500,000 the maximum tax-free lump sum you could take would be about £125,000. Selling your NS&I Premium Bonds and individual savings account investments might be able to cover the shortfall. Or maybe you have a lump sum to take from your DB pension.
But if you take the tax-free cash from a pension pot with a value of, say, £500,000, this would only leave £375,000 from which to generate £23,000 a year. If this pot grew 3 per cent a year and inflation was 2 per cent, it would last until you reach age 85. Whether there would be anything left to pass onto your wife would depend on how long you live, inflation rates and investment growth. With this size of pot size and income level, this is possible but not guaranteed.
Clearing your mortgage sooner might enable you to reduce the level of income you need to take – if you have no other debt you might be able to live on a bit less than £35,000 a year.
You hold a wide selection of direct shareholdings and funds, and have an emphasis on companies that pay generous dividends. Telecoms and utilities companies have historically offered relatively reliable dividends, given consumers’ ongoing need for their services – whatever the economic backdrop. But more economically sensitive sectors such as housebuilders and banks, which you hold widely, have proved to be more vulnerable to recession and dividend cuts.
The funds you hold further diversify your portfolio by geographical region, company size and industry type. But the correct balance between diversification and focus warrants consideration. As you hold over 50 investments there is arguably no room to add new ones without making this portfolio increasingly unwieldy. Proceeds from reductions in sectors in which your portfolio is overweight, such as banks and housebuilders, could be reinvested in existing fund holdings – if you do not take them as part of a lump sum.
You could reinvest the proceeds of sales of bank and housebuilder stocks in income-orientated funds such as Lowland Investment Company (LWI), and tracker funds whose yields have recently been boosted by stock market falls, for example, Vanguard FTSE 100 UCITS ETF (VUKE) and iShares FTSE 250 UCITS ETF (MIDD).
Tony Moss, branch principal and chartered financial planner at Raymond James Barbican, says:
It’s important to consider not only your objectives and needs on day one of retirement, but also throughout retirement. You should have a sustainable plan which can withstand expected and unexpected changes in your circumstances. Building out a timeline over the years and using cash flow analysis would help to stress test this, and enable you to consider ‘what if’ scenarios such as a significant market crash, or if either of you needs long-term care.
A large proportion of your desired annual income in retirement of £35,000 can be covered by guaranteed income sources – your own and your wife’s state pensions and your DB pension. Your state pensions will rise each year protecting you from rising inflation and it is likely that your DB pension will too. Initially, the remaining annual income required from your Sipp will be around £10,000 net – if you take into account your wife’s state pension and income of £4,000 a year in retirement.
Before deciding how to generate the remaining income required from your pension, I would have a few questions on your mortgage and other planned one-off expenses. Along with your broader objectives, these would be key to identifying how you finance them.
You want to draw from your pension via some form of income drawdown. However, because of rising interest rates and the security they offer, I would look at the case for annuities if only to make sure that discounting them is right.
You can typically take 25 per cent of your pensions as a tax-free lump sum, and with a Sipp value of about £569,000 this would equate to £142,250. You do not have to take the tax-free sum out all in one go, and your wider circumstances would determine what this might be used for and when.
Flexi-access drawdown enables you to access your pension whenever you want, and you can vary withdrawals at any point. You can draw tax-free lump sum money and income at different times, which provides flexibility. Drawing the tax-free lump sum in segments along with taxable income within your allowances and tax bands, enables you to withdraw very tax efficiently.
UFPLS is another option, but with this method every time you draw some money only 25 per cent is tax-free and 75 per cent is taxable. This may be appropriate in some circumstances but is not as flexible.
Any remaining pension fund at the time of your death can be passed to your beneficiaries inheritance tax free. Pensions have their own tax rules on death which are different pre and post age 75. It’s important to complete a death benefit nomination, as most pensions fall outside your estate so are not covered by wills. The wording of your wishes is important to ensure that your wife is nominated as a priority and other potential beneficiaries are considered.
Your investment strategy mainly focuses on dividend income but this could be very risky. Withdrawals from your pension can come from both income and capital growth, and it is important that what you are invested in is diversified to spread risk. If you only invest in high dividend paying companies, your portfolio may not have sufficient diversification and could be highly correlated. You could also miss out on long-term capital growth as these companies tend to pay their shareholders dividends rather than investing to grow the company. In a diversified portfolio, it is healthy to aim for a total return made up of both capital and income – rather than just income.
Your portfolio is mainly invested in single company shares and this is generally considered to be a high-risk strategy. You might be comfortable with this, but as you are approaching retirement your investments will become more important and need to provide income for the next 20 to 30 years. Consider your willingness, ability and need to take risk – as well as your capacity for loss. Although you might be willing to take a high-risk approach is it necessary? Do you have the ability to do this? These are questions I would consider to help determine your asset allocation.
There are many different asset classes which can diversify your returns and are typically not as highly correlated to equities. Diversification across these should reduce some of the peaks and troughs in your portfolio’s performance, which will be important as you start to draw a regular income.
Careful structuring of your income provision and building a more diversified portfolio, which you review along the way, should provide value throughout retirement.
