Getting ready for retirement in the UK

"According to my budget, I have saved up enough to support my wife and myself for perhaps another 30 years," he says. "Thus, my primary objective is to grow my retirement savings in line with inflation over the next five years without losing any capital.

"My attitude to risk is cautious because I have saved enough for my purposes and would now like to ensure that I don't lose capital while at least keeping pace with inflation.

"Because I have lived and worked abroad for so long I do not have a self-invested personal pension (Sipp) and do not own property in the UK. I have never traded, except in the case of a very poor general equity fund which I sold when it lost 40 per cent of its value in 2009.

"I am attempting to align my portfolio with Investors Chronicle recommendations. However, I have been reluctant to increase my equity exposure because the markets seem to be overvalued, and as a result I have held a lot of cash for many years, always hoping for the long-awaited market adjustment.

"My intention is to follow Bearbull, and the Bargain portfolio, and to buy Investors Chronicle recommended investment trusts when the time is right." 

Jason Hollands, managing director, Bestinvest says...

I note you are a 62 year-old expat looking to retire in the UK in five years after a long career working overseas. Your investments, valued at £815,000, will need to support you and your wife during retirement as you don't think you are eligible for a UK pension. You have built up a significant sum and believe that, adjusted to keep pace with inflation, it will be sufficient for your needs - potentially for as long as 30 years.

With much improved life expectancy people are indeed living considerably longer in retirement these days. That's great news but the funds required to support a long and secure retirement are considerable, and people often underestimate the level of financial resource they will need to achieve that.

Staying ahead of inflation and thus retaining the real value of your wealth should be a high priority for any investor. Currently there is a very benign inflation environment in the UK, with inflation below the Bank of England target rate of 2 per cent, but for longer-term planning purposes it might be prudent to assume a level of more like 3 per cent.

Based on the current value of the portfolio, it might provide an income of around £28,000 per year in today's money. As it appears none of the investments is held within UK tax-efficient wrappers due to your expat status, this sum would be subject to tax and could vary from year to year, depending on capital values and future yields on equities and bonds.

You do not have a UK property. One of the biggest challenges long-term expats face when returning home is the cost of purchasing or renting a property. It may be the case that you can fund this separately, for example from the sale of a non-UK property.

Your describe yourself as cautious, aiming to grow your savings "in line" with inflation over the next five years "without losing any capital." Of course the only investment that won't run the risk of capital losses, providing the bank doesn't go bust, is cash but this certainly won't keep pace with inflation. You therefore need to accept a degree of risk to keep pace with inflation, and preferably grow the assets a little in real terms.

Given your attitude to risk, the existing portfolio is far too heavily weighted towards equities. Putting aside the cash balances you say are temporary, as you wait for an adjustment, around 70 per cent of your exposure is in long-only equity funds or single securities. In a defensive portfolio we would typically look for equity exposure of between 20 and 35 per cent. You need to be shifting the focus towards less volatile assets.

Not only do you appear over exposed to equities, given your risk appetite and objectives, your market exposure is very aggressive with an underlying weighting in your equity exposure of around 27 per cent to Asia ex Japan shares. While we believe these markets offer a compelling long-term opportunity, they are also highly volatile markets. You have a fairly short time horizon and this is a big bet to take for a cautious investor. To put this in context, Asia ex Japan represents just 3 per cent of the MSCI AC World Index.

The portfolio is also too concentrated. Excluding the cash holdings, nearly 70 per cent of assets are in three funds with a single fund management company, Bermuda-based Orbis. We would typically invest a portfolio of this size across 20 funds, selecting from a wide range of managers. Few fund groups are consistently strong across all markets.

In a defensive portfolio, we would typically suggest around 30 per cent in fixed income and 30 per cent in alternatives, that would include around 20 per cent in targeted absolute return funds and 10 per cent in well diversified commercial property with high quality tenants.

You say you have a 5 per cent exposure to fixed income yet this represents just two securities, at least one of which is a structured product with returns linked to a stock market index. You have 5 per cent in an illiquid student property investment and 5 per cent in an absolute return fund.

Lee Robertson, chief executive officer, Investment Quorum says...

I note that you wish to retire in the UK in five years' time, but are currently working abroad so do not have a Sipp or other UK-based tax advantageous investment vehicles, or UK property.

Your portfolio is currently worth £815,000 and we would take this opportunity to congratulate you on having amassed a considerable amount of capital. Your objective is to grow the portfolio in line with inflation over the next five years without losing any capital, and your attitude towards risk is cautious, so you have around one quarter of your portfolio in cash.

Clearly, your current portfolio does have defensive qualities, with 24 per cent in cash and 18 per cent in fixed interest and absolute return funds. But with your requirement to keep pace with inflation I would suggest that even having a cautious outlook, this proportion is too large and will hinder your chances of meeting this key objective.

I would therefore suggest you align the portfolio more towards a total return strategy seeking both capital growth and income yield, from dividends and bond investments. This type of strategy has paid out handsomely over the past few years with inflation and interest rates at historic lows. Even with the current subdued levels of inflation and problems with finding quality yield from bonds, this strategy should serve you well over your retirement years.

Therefore, with this in mind, I suggest restructuring your portfolio towards more of a growth and income strategy for the next five years and beyond. This is because if your portfolio does not keep pace with inflation it will seriously impact on the capital purchasing power of your investments over the medium to long term.

In terms of fund selection, you should consider some exposure to ones such as (IC Top 100 Funds) M&G UK Inflation-Linked Corporate Bond (GB00B3WZMB82) and NB Global Floating Rate Income (NBLS), which will give you some protection against rising inflation and interest rate environments, both of which we think will happen.

For both capital growth and income you could buy funds such as (IC Top 100 Funds) M&G Global Dividend (GB00B39R2M86) and Fundsmith Equity (GB00B4LPDJ14), as well as Artemis Global Income (GB00B5VLFH80), Lindsell Train UK Equity (GB00BJFLM156) and Henderson UK Equity Income & Growth (GB0007493033).

If you wish to consider a cheaper way of accessing some of this strategy you could also consider exchange traded funds (ETFs) for the index linked bond element.

Our reader's portfolio