Broaden your exposure to achieve your income goal

"I require 5 per cent income every year," says Aunali. "I also have individual savings accounts (Isas) worth about £150,000 and a state pension worth about £10,000 a year.

"I would say that my risk profile is medium and I am prepared to lose up to £5,000 in a year. I don't like funds with non-transparent charges, but do like income-producing shares."

Aunali's portfolio

*As at 9 September 2016

THE BIG PICTURE

Danny Cox, chartered financial planner at Hargreaves Lansdown, says:

You want to draw 5 per cent a year from your Sipp to supplement your state pension and other income, and are currently spending most of the total return as income at the expense of capital growth potential. This is important as capital growth provides the opportunity for income growth, which helps to offset inflation. Average life expectancy suggests you could live for another 19 years.

You say you would be uncomfortable if you lost more than £5,000 over a year. However, there are no guarantees underpinning your portfolio and falls of 6 per cent are not uncommon. Providing that you continue to spend income and not capital, short-term falls in value should not be a problem.

From a death benefit perspective, of critical importance is nominating beneficiaries. This would ensure your partner benefits from the value of your Sipp should you die first.

Sipps are dealt with separately from your estate and a will should be used to ensure the right people benefit. If you and your partner are unmarried, there could be an inheritance tax (IHT) consequence when you die. The first £325,000 of an estate is normally free from IHT, with the balance taxed at 40 per cent, which could result in an immediate tax charge of £130,000.

James Norrington, specialist writer at Investors Chronicle, says:

With no mortgage to worry about, the state pension and dividends from your Sipp provide a nice source of disposable income. Having £150,000 in your Isas makes it unlikely you will need to sell shares from your Sipp to fund any unexpected expenses, so you can afford to take a fairly laid-back approach to market risks that might cause your Sipp to suffer short-term capital losses. Instead, you should focus on the income-generating capacity of your portfolio.

There is a reasonable chance of losing more than £5,000 in a bad year with a UK equities portfolio, although I think that your strong cash position means you have the capacity to absorb this risk. The way that you manage your overall wealth, and the risk of sustaining losses, is a good example of mental accounting.

The house is safely paid for, you have plenty of cash and the Sipp is for the risky stuff. This is a perfectly valid and commonsense approach to managing money, after all, what's the point in trying to be too clever if your needs are met?

Taking a holistic look at your total wealth ( rather than just the Sipp), the high proportion held in cash suggests a low appetite for risk. Cash holdings are not risk-free, though, as inflation can eat away at your wealth while interest rates are on the floor. This is certainly not to say that you should move all of your cash into asset classes such as equities, but it may be worth increasing the proportion of volatility risk to offset inflation - the silent wealth killer.

The important thing is to make such choices with a clear picture of what you might actually lose. In a severe equity bear market you could see a paper loss of up to half of the capital you hold in shares. Retaining a cash reserve means your liquidity needs are covered, so you are better able to ride out the bad times when shares do badly.

On the other hand, over the long term the performance of shares can outpace inflation and in the meantime you can either reinvest dividends or draw more of an income. It's all a balancing act: offsetting the risks of different asset classes against one another, which is the art of portfolio management.

Mike Pate, partner, Killik & Co, says:

You have used all but £1,000 of your annual personal allowance through receipt of your £10,000-a-year state pension. We would therefore suggest that no more than £1,000 is taken as income from the Sipp via drawdown, to ensure you do not incur any unnecessary income tax. We would suggest you get the remaining income you need from your Isa.

If we count the Isa and the Sipp together, you have a total portfolio of around £228,800. You have said you would feel uncomfortable losing more than £5,000 a year, which represents 2.2 per cent of the total portfolio. The FTSE 100 has experienced considerable volatility this year and equity market volatility may be unsuitable for you, so your risk exposure may be too high given your age and stated risk tolerance.

HOW TO IMPROVE THE PORTFOLIO

Danny Cox says:

You have a combination of high-yielding investments - five individual shares, an exchange traded fund (ETF), and a bond fund. You say you are uncomfortable with funds that do not have transparent costs, however your current portfolio lacks diversification. Using more funds instead of shares would help.

Insurers and financials make up a hefty 47 per cent of your overall portfolio before taking into account the exposure through the ETF. Financials have taken a battering of late, hence the attractive yields, and they might benefit from a recovery in their share prices at some stage.

Your income target is high relative to the yields available from a more diverse portfolio, where income of around 3 per cent to 4 per cent would be more realistic and sustainable.

James Norrington says:

Looking at the Sipp, the holdings are reasonably diversified and on the whole have performed well. For an income portfolio, the key points to look out for are the:

■ Level of dividend cover - how many times the payout can be covered by earnings.

■ Growth rate of the dividend and companies' overall cash position.

If you decide to sell investments that give you concerns in any of these areas, and/or divert a proportion of cash into risk assets, then it would be wise to consider collective investment vehicles to broaden your exposure.

Your point on the transparency of fund performance and charges is valid, but Investors Chronicle's Top 100 Funds highlights some open-ended investment companies, unit trusts and investment trusts that don't have excessive charges.

New entrants in this year's list with a focus on generating income include Fidelity Global Dividend Fund (GB00B7778087) and Evenlode Income (GB00B40Y5R17), which was highlighted by our panel as a good core UK equity holding.

I would also recommend reading John Baron's portfolio to see how he uses investment trusts that distribute income.

Mike Pate says:

We would suggest you build a fixed-income portfolio with an average projected yield of 5 per cent to meet your income needs. This could be achieved by investing in a mixture of investment-grade corporate and sovereign debt. To achieve enough diversification, have a minimum of 20 bonds and gilts to lower the risk profile of the portfolio.

If you were willing to accept a greater level of risk, incorporating equities would make the task of achieving a 5 per cent yield more viable.

Investors are starved of yield due to the fact that government and corporate bond yields have shrunk dramatically. This means they have turned to the equity market for yield, which can lead to a greater level of risk being taken. We would look to manage this risk by purchasing companies with strong balance sheets and earnings visibility, while searching for thematic drivers that could provide a sustainable growth trajectory.