Surgeon aims for £150k retirement income plus £500k holiday home

ADAM'S PORTFOLIO (INCLUDING HIS WIFE'S HOLDINGS)

NON ISA SHARE ACCOUNT HOLDINGS

OTHER ASSETS

Index-linked NHS pension of £85,000 a year at age 60, plus £375,000 lump sum.

Adam's wife has personal pension funds of £130,000 with Standard Life and Aviva.

Chris Dillow, Investors Chronicle's economist, says:

I like that you have a clear target for your retirement wealth, and a reasonably realistic plan on saving for it. Assuming a real return of 5 per cent a year and that you save as much as planned, you'll have a pot of around £1.5m in seven years' time; this is in today's money. On current annuity rates, this should give you both an annual income of just under £80,000 a year. With your NHS pension, this should give you the two-thirds of your present income you want. And that lump sum from your pension will go a long way towards getting you the second home you want.

(I'm not saying you should immediately annuitise your wealth. I'm using annuity rates as a guide to the amount you might safely withdraw from your wealth by each year.)

It's possible that returns fall short of 5 per cent a year. But it's also possible that they exceed them; over a period as short as seven years, there's huge variation around expected returns. And it's quite likely that annuity rates will rise, giving you a larger income.

The big question about this portfolio - will it do what you want it to? - can thus be answered in the affirmative, insofar as we can tell.

Nevertheless, there are some issues.

First, in wanting to buy a holiday home, you are exposed to house price risk - the danger of prices rising so much that £400,000-£500,000 doesn't buy you as much as you'd like. If you plan to downsize from your current home, you have a natural hedge against this risk. If you don't want to do that, though, you are exposed to this risk.

What to do about this? Buying individual construction stocks is probably not the answer, given their large volatility. If it's an overseas home you want, consider holding the currency of the place you want to buy; this will at least help protect you from exchange rate risk. Or consider real estate funds, on the basis that these might benefit from the same loose money policies that would raise house prices. Alternatively, though, you might simply take it on the chin; not all risks are worth trying to insure against.

A second issue is: do you really need so big a retirement income? Many readers, I suspect, would consider £150,000 a year a massive sum. Why do you want so much? Is it because you plan to drive to the world's best golf courses in a Ferrari? Or is it because your perception of the income you want is tied up with status concerns and a desire to keep up with the Joneses?

Financial planning is only part of the problem of wealth management. Another part is character planning - ensuring that we don't have such expensive habits that we need to work, save and take risks merely to finance them. If you can downgrade your expected income, you might make life very easy for yourself indeed.

You ask whether you've invested in too many funds. The answer's yes. It's a wonderful paradox that you're so careful to minimise taxes, and yet so careless about minimising fees. The problem here is straightforward. Any reasonable bundle of shares will be quite highly correlated with the market, which means in turn that bundles will be correlated with each other. This means that if you accumulate many funds, you can end up with a portfolio that acts like a tracker fund, except that you're paying a percentage point per year more than you need to in fees.

Think about ditching some of your funds - especially the more general equity ones - in favour of simple tracker funds or exchange traded funds (ETFs).

Jeremy Le Sueur, managing director 4 Shires Asset Management, says:

Unfortunately, the lifetime pension allowance, and the reduction in the allowance to £1.25m from £1.5m that comes into effect in April 2014, will directly affect your income in retirement. In a defined benefit pension scheme such as the NHS scheme, 20 times your annual pension plus your tax-free cash must not exceed your lifetime limit of £1.25m. However, if you apply for protection from HMRC before April 2014, that limit may be increased to £1.5m. This might imply a pension of approximately £60,000 and £300,000 tax-free cash. From that point onwards your benefits must not accrue at a rate higher than inflation (or a rate allowed by the scheme). So, if for example your pension accrued at inflation for seven years at 2.5 per cent a year (assuming that was the average inflation rate), then your pension would be circa £71,300 at retirement, and your tax-free cash would be circa £356,000.

You should consult the administrator of the NHS pension scheme for clarity on the change to your potential benefits and their projected values as a result of the lifetime pension allowance.

To buy the property, I would move £144,000 of your non-Isa holdings - capital gains tax permitting (CGT) - into dated fixed interest securities with a five to seven year maturity and a gross redemption yield of at least 5 per cent. At retirement add the £356,000 tax-free cash to give you £500,000 to spend on your property. Should you decide to buy the property early, you could take out an interest-only mortgage using your £144,000 in bonds as a deposit with the pension tax-free cash available to pay off the capital sum.

You should transfer all your non-Isa holdings into your wife's name. Any income received from shares by a basic-rate taxpayer has no further tax to pay. Where there are CGT issues over selling the shares, make sure you utilise both of your annual exemptions.

It would be sensible to consolidate your holdings to between 30 and 40 investments (you currently have over 70). You should have a selection of above-average yielding shares with good dividend cover and fixed interest securities, alongside investment trusts with a good geographical spread (unit trusts tend to have higher fees and lower performance than investment trusts). You should target a yield of at least 4.5 per cent to meet your income target.

The Isas will be particularly valuable in retirement, as any income will be untaxed. Using venture capital trusts will mitigate your ongoing tax bill while you are working, and once you retire, hopefully the funds will be producing tax-free income.

Your wife should take her pension's tax-free lump sum, and put the balance into a self-invested personal pension (Sipp) in drawdown, taking approximately 4.5 per cent a year. This will hopefully allow the portfolio to grow a little over time.

Given the lifetime allowance restrictions and the security of the NHS pension, I would agree that your risk appetite is higher. It should also allow more capital growth from which to take income as you reach retirement. As you both get older (70-plus) your risk attitude will probably reduce.

I think if you use income paying VCTs, direct shares or bond and investment trusts, and concentrate your investments on income generating assets to give yourself a pre-tax portfolio yield of 4.5 per cent, you should reach your desired income in retirement and be able to buy your £500,000 overseas home.