Linton, age 58, is looking to move abroad and needs £25,000 income.
He says: "I am 58 and my wife 43. We are both currently employed by my small IT consultancy firm, earning around £12,000 each in salaries and sharing £30,000 net dividends. We are contributing £240 each month from our salaries into each of our self-invested personal pensions (Sipps), with a further contribution from the company of £9,000 each a year. There could potentially be further company pension contributions as there have been no pension contributions in the past several years. We have no other savings, and our outgoings consume more or less all of our personal income.
We are aiming to move abroad in three to five years time to retire, and are looking for an income between us of around £25,000 a year. We have no children or other family, so plan on using a gradual drawdown of capital so as to minimise the value of our estate when we die.
I have a preserved civil service pension that starts paying when I'm 60 with a lump sum of £7,000 and monthly pension of £150, while my wife has a preserved local authority pension that will start when she is 60 with a lump sum of £3,000 and monthly pension of £80.
Our house is worth about £450,000 and will release about £150,000 of capital when we move at the time of my retirement."
Self-invested personal pensions
£25,000 income and move abroad
Linton's Sipp portfolio
|Holding||Value (£)||% of portfolio|
|AXA FRAMLINGTON UN BIOTECH Z ACC||2,274||6.21|
|BLACKROCK ASIA SPECIAL SITUATIONS D||2,386||6.52|
|CLOSE FTSE TECHMARK X ACC NAV||2,403||6.57|
|FIDELITY UK SMALLER COMPANIES W ACC NAV||2,388||6.53|
|MFM SLATER GROWTH FUND P ACC||2,624||7.17|
|MINDS + MACHS GRP ORD NPV (DI)||1,680||4.59|
|NEPTUNE JAPAN OPPORTUNITIES C ACC NAV||2,415||6.6|
|POLAR CAPITAL HEALTHCARE OPPORTUNITIES FUND I USD INC NAV||1,748||4.78|
Linton's wife's Sipp
|Holding||Value (£)||% of portfolio|
|ARTEMIS GLOBAL GROWTH I ACC||400||4.41|
|ARTEMIS GLOBAL INCOME UNITS INSTL ACC||300||3.31|
|LEGAL & GENERAL||2,618||28.86|
|LLOYDS BANKING GROUP||2,590||28.55|
|M&G GLOBAL DIVIDEND I INC GBP||1,188||13.07|
MEETING YOUR INCOME GOAL
Chris Dillow, the Investors Chronicle's economist, says:
Your biggest problem here is that, on current plans, you probably won't build up enough wealth to get a retirement income of £25,000 a year.
Assuming real returns on equities of 5 per cent per year, you'll probably have around £350,000 in five years' time, even with the capital released from your house. However, to get an income of £25,000 a year probably requires a pot of more than £500,000.
Two things make me fear your problem is even worse than this.
One is that you might be underestimating your need for retirement income. You say that your current income of £54,000 is consumed by outgoings. Granted, almost £6,000 of these are pension contributions. But even so, this implies you will almost halve your spending in retirement. Can you really do this?
Secondly, if you are in average health, you'll be retired a long time. According to official estimates, an average 58-year-old man can expect to live for another 25 years while a 43 year-old woman can expect another 42 years. This implies that, with average luck, your wife will be retired for 37 years. On such a long retirement you can only draw down your wealth very gradually.
In terms of what can you do, one obvious suggestion is to delay retirement.
Another possibility is to review your outgoings to see if you can save more. If you think you can limit your spending to £25,000 per year in five years' time, try doing so now. If you can, you'll be able to top up your pension contributions, or open an Isa. If you can't, you'll have learnt that your retirement needs are greater than you think.
A third possibility is to think about trading down your house even further. There are lots of nice places in the world where you can buy a great house for less than £300,000. This could release a lot of cash.
|MOVING ABROAD SPECIFICS|
Chris Dillow says:
Anyone thinking of retiring abroad is taking on lots of currency risk. If you're thinking of moving to the euro area, any rise in this currency would increase your future outgoings, making retirement less feasible, while any fall in the euro would make your pounds go further and get you a more comfortable retirement.
This risk is large. Based on volatility since 2000, there's a roughly one-in-seven chance of the euro rising 20 per cent or more over the next five years - implying a 20 per cent cut in the purchasing power of a sterling pension pot, and a one-in-seven chance of it falling 20 per cent or more - implying a 20 per cent rise in the effective value of such a pot.
Ordinarily, I'd advise those thinking of moving overseas to invest in the currency of the country they plan to move to in order to minimise this risk.
However, if you're feeling brave you might want to take it on. A fall in the euro might be a painless way of increasing the effective size of your pension pot. Better still for potential British retirees, there is still a chance of Greece leaving the euro, in which case 'Greek euros' or drachmas would become very cheap relative to sterling. For anyone struggling to save for a decent pension but wanting to move to sunnier climes, perhaps a useful strategy would be to learn Greek!
HOW TO IMPROVE YOUR PORTFOLIO
Lee Robertson, chief executive officer, Investment Quorum
You both contribute £240 a month from your salaries into your Sipps and also receive a further contribution from the company of £9,000 a year. You may wish to explore whether further pension contributions are possible due to the gap in contributions. We have assumed your outgoings account for more or less all of your personal income.
The portfolios need to be restructured so that they can start to deliver a growth and income return that will help to support your needs in three to five years' time. I would suggest that you carefully sell the direct holdings to minimise individual risk, and reinvest the proceeds into a selection of good quality funds, with good growth and income potential.
If this restructuring were to begin relatively soon your monthly contributions to your Sipps could be invested accordingly so as to take advantage of pound-cost averaging over the next three to five year period, and to build up worthwhile positions. There are some funds that are worth retaining in Linton’s portfolio which I have left out of my advice as they are suitable for purpose.
I would suggest Linton sells:
Close FTSE Techmark (GB00B87JKQ15)
Minds + Machs Group (MMX)
Photo Me (PHTM)
Plethora Solutions (PLE)
Tissue Regenix (TRX)
Linton could consider buying the following funds:
Woodford Equity Income (GB00BLRZQ513)
Old Mutual UK Equity Income (GB00B1XG9151)
Miton UK Value Opportunities (GB00B8KV0M06)
Artemis Global Income (GB00B5V2MP86)
BlackRock Continental European Income (GB00B3Y7MQ71)
Old Mutual North American Equity (GB00B1XG9G04)
Invesco Perpetual Monthly Income Plus (GB00BJ04K042)
Kames Property Income PAIF (GB00BK6MJF73).
I would suggest that Linton's wife sells the following holdings:
Artemis Global Growth (GB00B2PLJP95)
Legal & General Group (LGEN)
Lloyds Banking Group (LLOY)
M&G Global Dividend Fund (GB00B39R2R32)
She could consider buying the funds suggested above that she doesn't already have, as well as BlackRock Asia Special Situations (GB00BJGZZ065).
I have suggested these changes to diversify your portfolios, and reinvest income for future growth to provide the level of income you are seeking to achieve. There are a number of moving parts in your assumptions regarding your property value, but these suggestions should enable you to achieve the levels of income you are seeking at the appropriate time.
Thomas Becket, chief investment officer, Psigma says:
Given currently expensive global asset valuations and the relatively short time horizon, diversification is crucial for you and your wife. With the vast majority of their assets in UK equities, moving some assets into bonds, resources and alternatives could vastly reduce the downside risk.
While healthcare and technology have been strong sectors over the past few months, such concentration increases risk dramatically. While we agree that there are thematic opportunities in markets, they should be utilised as part of a more balanced portfolio.
Retiring abroad will also mean you need to consider the additional currency risks.
The greatest risk that any investor has over the medium to long term is their assets not keeping pace with inflation, so this should be the dominant factor behind key investment decisions. A major short-term concern is not losing too much money, particularly for older investors or investors coming up towards retirement, but by creating a balanced investment portfolio with a focus on inflation this should allow investors of any age to have some comfort about the future.
Given your investment time horizon is still quite long we would advocate a portfolio mix of equities, fixed-interest investments, commodities, alternatives and cash. Despite having some short-term concerns over equity markets we still see the potential for further growth over the next few years, but would suggest that the amount you and your wife hold in equities is too high for anyone apart from those with a super-long time horizon, or whose portfolio is just a small part of their overall net wealth. A reduction in equity investments in favour of some fixed-interest investments would therefore be appropriate.
There is much talk about how bonds are bad value, particularly given the likely rise we will see in US and UK interest rates in the coming quarters. But such a generalisation would lead you to miss potentially rewarding investment opportunities, especially among higher-yielding corporate bond markets and specialist bonds. Our balanced portfolio model, which targets a return of inflation plus 3 per cent might be suitable for you, as the information you have given suggests an equity allocation of 47.5 per cent and a fixed-interest component of 30 per cent, split between gilts, corporate bonds, inflation-linked bonds and corporate high yield. Such a fixed-interest mix, evenly weighted, should allow for an income return of 4 per cent per year.
Within your equity allocations we would opt for a globally diversified portfolio incorporating a focus on markets that offer interesting value opportunities, such as Europe and Japan, as well as a small allocation to emerging market equities. Given that your time horizon is still quite long we would suggest that a small allocation to good long-term growth stories such as India would enhance the portfolio.
Emerging market equities could help to provide some long-term inflation protection and we would also view a small allocation to commodities as being helpful in that regard.
Now is a time to not take large bets on one asset class, particularly after seven years of good returns. A diversified portfolio would be a better way of protecting against future inflation, as well as affording some protection against market shocks.