Sorting a strategy and risk level for retirement

"I'm single with no dependants and would like to retire before I reach 65, or go into semi-retirement. I don't really have any fixed plan and I don't know how much money I will need to retire. I think I am holding too much cash, and would like to invest my future cash into a safeish investment that will be able to equal or beat inflation. I do like the occasional gamble, though, so don't mind a couple of high-risk investments.

My investment objective is my retirement and I would describe my attitude to risk as medium to high, but would like to be medium to low. I would describe myself as an average investor other than the fact that I will be working out of the country for the next year at least so may not have to pay any UK tax.

Ben Yearsley, head of investment research, Charles Stanley Direct says:

Being out of the country for a couple of years means there isn't any opportunity for tax planning, however that doesn't mean you should ignore your investment portfolio.

Interestingly, you say you have a medium- to high-risk approach but would like to be medium- to low-risk. Anyone investing in either funds or shares is at least a medium-risk investor even if they just invest in corporate bond funds.

You are 47, have no dependants and don't know when you want to retire: this makes it quite difficult to plan. You need to decide early on when you would like to retire and how much money you need in retirement: that will then help determine your strategy and whether a medium- to hig- risk approach is needed or desired.

Your self-invested personal pension (Sipp) is a concentrated portfolio of just six funds, all very good but also all high-risk. There is nothing wrong with any of the funds, the only point I question is the strategy. Do you deliberately hold three UK funds and three overseas, or is it a result of just buying some favoured funds? In addition, two smaller company funds out of six seems high-risk. Maybe a bit more balance is needed in the portfolio with a couple more core holdings such as Murray International Trust (MYI), Scottish Mortgage Investment Trust (SMT) or Troy Trojan Fund (GB00B01BP952).

Regarding the Isa holdings, I will deal with the banking shares first. Out of five shares in the Isa, three are banks. I wonder whether these are potentially an investment gone wrong and you feel you now can't sell. I wouldn't sell banks at the moment, but if you want to add shares to a unit trust portfolio I would have more than five shares, and spread across different sectors. Oil shares, for example, have been left behind in the market rally and could be considered, either to add something different or be something for the brave as this sector has had a dreadful 2013. You need to decide whether you really want shares in the portfolio as it seems halfhearted at the moment.

Your Isa portfolio is very high-risk. You have 10 funds with an emphasis on Asian and emerging markets. Do you need three First State funds when there could be a high degree of cross-holdings in them? The only thing that stops me from saying sell one of them is that the China fund has soft closed and the Emerging Markets one is about to soft close (on 7 September it will impose a 4 per cent front-end charge), meaning if you sell out of them you won't be able to buy back in. There isn't anything I would sell, however maybe you could add some funds doing something different, such as Artemis Alpha Trust (ATS).

The non-tax-wrapped investments seem a slightly random collection, in contrast to your Isa which seems more thought out.

There is nothing really wrong with any of the funds you invest in, but what is the strategy? How do they fit together or have they just been bought as they were the favourites at the time?

I don't have any issue with the number of funds in your portfolio, but I question the number of shares. Either do it and have another 10 or so, or don't bother. The other thing I question is strategy and risk: this is a high-risk portfolio with a small number of medium- to low-risk funds, but what risk do you actually want to take?

Jane Heyman, chartered financial planner and Steve Walklett, tax specialist, McCarthy Taylor say:

For a person aged 47 planning to retire around 65, income in retirement is important. When working overseas for any long period, the situation is complicated, as contributions to tax-efficient methods of retirement saving such as Isas and pensions cease in the year of departure for Isas, and within a couple of years for pensions.

Depending on your status, as a resident you may still be able to make pension contributions. The new statutory residence test applies post March 2013 and make it easier to establish non-residence.

You feel you are over-diversified, but we disagree. Where we do see problems are with the individual share holdings and collective funds investing in the same area: there will be crossover with stocks such as BG (BG.), Barclays (BARC) and Tesco (TSCO). Your UK equity allocation should be accessed either directly via FTSE 100 shares or funds. While there is nothing wrong with holding both funds and equities, we suggest that these are in different areas, for example direct holdings in FTSE 100 shares and collectives for smaller-cap companies, otherwise there will be duplication which may result in overexposure. We would also hold less in commodities.

You have very little exposure to fixed-interest and this is an area we recommend you increase as you wish to reduce risk, although not at the current time. This is where holding cash could work to your advantage. We expect to see some value return to the bond markets as yields rise and values fall, so you may be able to take advantage of this if your surplus cash is available for investment.

There is a noticeable lack of exposure to direct commercial property and infrastructure funds, both of which would add additional diversification and have the potential for future growth. We also expect less volatility from these than equities, which would match your wish to reduce risk and should, over the medium to long term, outperform inflation. But ensure these asset classes do not form too large a part of your portfolio as they can become illiquid: we suggest an allocation of around 8 per cent in total for both.

The majority of your fund choices are sound, but there are some high-risk calls which you may wish to reconsider if you are looking to reduce risk, in particular Neptune Russia and Greater Russia (GB00B04H0T52).

You don't know how much you need at 65 to retire. As a rough rule of thumb, in the absence of any proper budgeting, we recommend you budget to spend two-thirds of your current salary less any mortgage or other debt being repaid. You then need to remember that this is subject to inflation. Again, the amount you can take from pensions and the amount the investment will yield in retirement, depends on a number of factors. As a very rough guide, we estimate £1m of investment should provide around £30,000 to £50,000 of income, depending on the investment strategy, tax structure and other factors.

You have a Sipp, which can be a more expensive way to save for retirement depending on the type and the deals provided. These can incur additional costs of over £100 a year or more, but some providers offer free Sipps.

At retirement, unless the fund value is well over £150,000 you may be faced with buying an annuity, which could seriously reduce the amount of pension you could take, as opposed to remaining invested, albeit with greater risk. You will need proper advice at the time but if you want to avoid annuities you need to boost your funds over the next few years. Get proper qualified advice on your pension options.

The overall portfolio is currently valued at around £107,000. In order to grow this and sustain income at retirement in 13 to 18 years' time you should continue looking at equity-related funds to provide sufficient growth. Inflation is likely to run on at around 3 per cent and returns needs to be above this to give you adequate retirement capital.

With this size of portfolio we do not recommend individual shares because you cannot diversify sufficiently. We suggest low-cost tracker funds such as Vanguard and Legal & General offer (preferably the institutional share classes which you can buy off a fund platform to reduce costs), or an exchange traded fund such as those provided by iShares. The annual charges of these are often a third of what active funds are.

We would then use active funds that have consistently outperformed, such as Perpetual Income and Growth (GB0033053488), again trying to access the institutional share classes via a fund platform.

For safeish investments for your cash that will equal or beat inflation, consider index-linked gilts and bonds either via collective funds or directly held. As both the coupon (interest payment) and capital are linked to inflation this would achieve your objective. Keep some cash back to buy into bonds and gilts over the coming months as prices fall

Over the longer term a well-diversified portfolio will also achieve your objectives, albeit with more volatility. You should dispose of higher-risk emerging markets other than China, which we think will ultimately become a winner, although at this stage exposure should be moderate to avoid currency risks. On the assumption you are returning to the UK you can keep your investments here in sterling and gradually transfer them to your Isas, or build them up on your return.

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