Join our community of smart investors

How can we supplement our pensions by £8,000 per year?

These investors need to consider what each holding is contributing
How can we supplement our pensions by £8,000 per year?

If they make their investments as tax efficient as possible they might not need to draw as much from them to meet their income target

Their self managed investments are over diversified  

Reader Portfolio
Bill and his wife 61

Pensions and investment accounts invested in funds and shares, cash, residential property.


Supplement pensions income by £8,000 per year, fund travel, give £50,000 to child as deposit for home, 3-4% annual return on self managed investments. 

Portfolio type
Investing for income

Bill is age 61, and he and his wife are retired. Their two grown up children are in work, and their home is worth about £200,000 and mortgage free.

“Our goal is to supplement our pensions income by about £8,000 per year and travel – when that is possible,” says Bill. "I also want to give one of my children £50,000 as a deposit to buy a home in the next year.

"We receive pensions income of £37,000 per year, with roughly 48 per cent of this being paid to me and 52 per cent to my wife. I also have an additional voluntary contribution (AVC) pension worth £50,000 which I plan to draw in future, initially taking my 25 per cent tax-free entitlement.

"I have a professionally managed portfolio with a value of about £226,000 which provides income of about £440 per month. It has a medium risk level.

"And we have £100,000 in cash.

“I have been investing for 35 years and would like my self-managed investments, which are worth about £70,000, to make a return of 3 to 4 per cent a year.

"I have reduced the risk level of these from moderate/high to moderate/low. So, for example, I recently sold a holding in Zoom Video Communications (US:ZM), and added the Jupiter Strategic Bond (GB00B544HM32) and Troy Trojan Global Income (GB00BD82KT70) funds. And I am considering adding more bond funds.”





Bill and his wife's total portfolio

HoldingValue (£)% of the portfolio
Professionally managed portfolio226,00050.74
AVC pension50,00011.23
GlaxoSmithKline (GSK)8,9672.01
Lloyds Banking (LLOY)5,2801.19
Threadneedle American (GB0001444586)5,2581.18
Janus Henderson US Growth (GB00B3B4JF96)3,3290.75
Jupiter Strategic Bond (GB00B544HM32)3,3070.74
Threadneedle American Smaller Companies (GB00B8358Z89)3,3060.74
Fidelity American Special Situations (GB00B89ST706)3,0400.68
National Grid (NG.)2,7450.62
Invesco China Equity (GB00BJ04HS18)2,5660.58
Troy Trojan Global Income (GB00BD82KT70)2,4400.55
Threadneedle European Smaller Companies (GB00B84CYY92)2,3710.53
AXA Framlington Biotech (GB00B784NS11)2,2160.5
Jupiter UK Smaller Companies (GB00B3LRRF45)2,1640.49
ASI Japanese Equity (GB0004521737)2,0550.46
Venture Life (VLG)2,0490.46
Lazard European Smaller Companies (GB00B88ZX473)1,8340.41
Janus Henderson Japan Opportunities (GB0007685026)1,6390.37
BP (BP.)1,4990.34
Antofagasta (ANTO)1,3490.3
Royal Dutch Shell (RDSB)1,2710.29
Threadneedle Pan European Smaller Companies (LU1829331047)1,1120.25
Creightons (CRL)1,0890.24
Schroder Asian Total Return Investment Company (ATR)1,0790.24
AXA Global Short Duration Bond (GB00BDFZQV30)1,0450.23
SSE (SSE)1,0250.23
Fidelity China Special Situations (FCSS)7950.18 (MONY)8110.18
Henderson EuroTrust (HNE)7680.17
Quilter (QLT)5790.13
Barclays (BARC)4630.10
BMO Commercial Property Trust (BCPT)3350.08
BT (BT.A)3700.08
ITV (ITV)3700.08
Centrica (CNA)2850.06
Verizon Communications (US:VZ)2610.06
Vodafone (VOD)1930.04
Old Mutual (OMU)1340.03
Saga (SAGA)320.01




Chris Dillow, Investors Chronicle's economist, says:

Your self-managed investment portfolio is overdiversified, which means you have something like a tracker fund, except that this has been acquired at greater cost in terms of dealing charges, fund management fees and effort.

Think about how a portfolio might outperform. It could, for example, do this if a particular holding beats the market. But it could also outperform the market if its holdings are correlated. For example, by holding loads of defensive stocks you could beat the market because you have lots of moderate outperformers – rather than because you have one stellar stock.

As you add holdings, you reduce the contribution each individual one makes to your overall return. This is because it accounts for a smaller share of your portfolio, and because you increase the chances of any outperformers being diluted by underperformers. Diversification works in both directions – it dilutes good returns as well as bad ones. As you add stocks, you also increase the importance of correlations between holdings.

Let’s say that your typical holding has a two-thirds chance of annual returns within 15 percentage points of the global market’s returns. For speculative stocks, the chances of deviations are greater than this and for funds they are less. And let’s say that the correlation of relative returns is zero; that is, if one holding beats the market there’s a 50:50 chance of another doing this. The maths of portfolio diversification tells us that a 36-holding portfolio – similar to the number of equity holdings you have – has a two-thirds chance of annual returns within 2.5 percentage points of the market’s. Which implies only a one-in-six chance of beating the market by more than 2.5 percentage points.

This is why I say that your self-managed investment portfolio is, in effect, a tracker fund.

It’s easy to get into this position. If you think of each stock or fund in isolation, you’ll see hundreds of attractive investments that will beat the market. But you shouldn’t only consider whether an investment will beat the market. You should consider what contribution it will make to your portfolio. If, say, one holding represents only 1 per cent of your portfolio, even if it beats the market by 50 percentage points it will add only 0.5 percentage points to your portfolio’s overall annual returns. 

Instead, you should think from the top down. First ask yourself, ‘what mix of safe assets and equities do I want?’

There are good reasons for not having a big equity weighting just now. Valuations are a little stretched; some good lead indicators such as the global money-price ratio are bearish; and the market might be pricing in a stronger economic recovery than is likely to happen.

I’m not sure, though, that this makes the case for more bonds than you already have. These will probably do well if equities fall. But if they don’t, you’ll lose. Cash is perhaps a safer asset – its losses are limited to the inflation rate.

When you have decided what your asset allocation will be, then think about how you will build an equity portfolio. The default holding should be a global tracker fund, which you could supplement with defensive stocks and funds – some of which you already have.

Even so, think about consolidating your holdings.


Christine Ross, head of private office (north) & client director at Handelsbanken Wealth Management, says:

A key concern for investors when starting to draw from a portfolio to supplement other income is the sequence of returns. Unless you are relying solely on the natural yield from a portfolio, making withdrawals during a period of volatility can have a lasting negative impact on the overall value. There is much discussion regarding the safe level of withdrawal which we regard as around 3 per cent a year. 

Taking a balanced investment approach with a target return of consumer price inflation plus 3 per cent should allow you to meet your income goal and preserve the spending power of your capital. The £440 monthly income from your professionally managed investments amounts to £5,280 per year – 2.3 per cent of that portfolio's value.  If you were to take 3.5 per cent from your additional investments this should meet your total investment income requirement of £8,000 and allow for a degree of inflation proofing. 

You mention bonds as a possible next investment. In prior cycles this would have been sensible given higher yields. Today, however, yields are low and likely to remain so, hence the temptation to creep up the risk spectrum for higher yields. It is only advisable to do this if it complements your overall investment strategy and fits in with your risk appetite.

You have been investing for a long time and your last three trades suggest that you understand listed equities and financial products. This should help when the investment journey becomes bumpy – as it inevitably will. As the saying goes, time in the market tends to be more helpful to long-term returns than trying to time the market.

By incorporating greater tax efficiency you may be able to meet your net income target and reduce the value of the withdrawals. You and your wife can each receive dividends worth up to £2,000 per year tax free. And if you transfer £20,000 worth of your existing investments into individual savings accounts (Isas) each year you will be able to receive more of your returns tax free. The transfers into Isas may trigger a capital gain, but if you only transfer in assets with a value of profitable gains that falls within your annual capital gains tax allowances of £12,300 each, you can optimise the tax efficiency of your portfolio.

Your AVC fund will continue to grow tax free in its pension wrapper until such time as you need to draw from it. 

You have £100,000 in saving accounts, which I suggest using for the £50,000 you wish to gift to your child as a deposit for a home. Although inheritance tax may not be a consideration, it is still worthwhile keeping a record of the date and value of all gifts.