- When markets are down it is better to draw from cash rather than investments
- When drawing income, these investors should look to use their tax allowances
- They should not reduce the risk of their investments too much as they need them to grow
Pensions, Isas and general investment account invested in direct equity holdings and funds, direct investments in commercial property, bonds and unquoted companies, cash, residential property.
£60,000 a year income, sustainably generate 3%-4% a year from investments, reduce risk of investments, buy ethical and environmentally friendly investments.
Jim is age 52 and his partner is 60, and they retired last year. He will start to receive a defined benefit (DB) pension when he is 63 which he expects to pay out around £9,000 a year from 2033. He has made 31 out of 35 years’ contributions towards getting the state pension, and his partner qualifies for the full state pension. Their home is worth about £850,000 and is mortgage-free.
Their home is worth about £850,000 and mortgage free.
"We would like an annual income of £60,000 net of investment costs, which rises in line with consumer price index (CPI) inflation," says Jim. "Our state and my DB pensions will contribute to this when they start to pay out. In the meantime, taking 3 or 4 per cent a year from a portfolio is often stated as a sustainable withdrawal rate that shouldn't run down the capital in real terms. But how does this work from year to year, including when a portfolio’s value bounces up and down?
"We don't have children so are happy to run down our wealth by the time we die. We will leave any assets which remain to charity. And we are prepared to have spent all the value of our investment portfolio by 2051 when I will be 82 and my partner will be 90. We will top up our income with equity release, if necessary.
"We have yet reduce the risk of our investments to a more appropriate level for not earning any income. As we hopefully have a long retirement ahead of us I think that our investments should be less volatile. And we found a 25 per cent fall in the value of our investments in spring 2020 scary.
"Our investments have a low allocation to bonds of about only 11 per cent. It's not a good time to invest in this asset but we could maybe start to drip feed more money in. That said, I have been investing for 30 years, and since quantitative easing has been more widely used since 2008 I have thought that a portfolio invested 60 per cent in equities and 40 per cent in bonds is questionable.
"But there doesn’t seem to be any consensus on how a suitable alternative portfolio, which includes alternative investments, should be allocated. I thought maybe 50 per cent in equities, 30 per cent in alternative investments and 30 per cent in bonds?
"I'm also not sure what is counts as an alternative investment. For example, are real estate investment trusts, and infrastructure and capital preservation investment trusts equities or alternative investments? And I don't know of any detailed sources of information on correlations between alternative investments, and equities and fixed income that are available to private investors.
"My previous forays into commodities haven’t been a great success so I don’t plan to invest in these, especially as I have probably missed the boat for now. I would like to buy more infrastructure investments and have recently added Digital 9 Infrastructure (DGI9), though this sector is expensive. I have also recently added BioPharma Credit (BPCR).
"I mainly buy investments I that I consider to be ethical and environmentally friendly, though recently switched a £45,000 investment in UBS MSCI United Kingdom IMI Socially Responsible UCITS ETF (UKSR) into iShares Core FTSE 100 UCITS ETF (ISF).
"I sold JPMorgan Russian Securities (JRS) in January, and other recent sales include Henderson Far East Income (HFEL) and Henderson Smaller Companies Investment Trust (HSL). I am also exiting our investments in peer-to-peer loans, as liquidity allows.
"I prefer investment trusts and exchange traded funds (ETFs) to open-ended funds, unless the investment I want to access is unavailable in the former."
|Jim and his partner's portfolio|
|Holding||Value (£)||% of the portfolio|
|Standard Life Ethical Pension (GB0003514527)||363,548||24.05|
|Direct commercial property investments||91,000||6.02|
|iShares Core FTSE 100 UCITS ETF (ISF)||89,575||5.93|
|Personal Assets Trust (PNL)||71,712||4.74|
|Jupiter Strategic Bond (GB00B4T6SD53)||61,430||4.06|
|Direct private equity investments||50,000||3.31|
|Pacific Assets Trust (PAC)||46,068||3.05|
|Tritax Big Box REIT (BBOX)||43,385||2.87|
|Domino's Pizza (DOM)||38,062||2.52|
|SPDR S&P US Dividend Aristocrats UCITS ETF (USDV)||35,112||2.32|
|Oakley Capital Investments (OCI)||34,503||2.28|
|iShares £ Index-Linked Gilts UCITS ETF (INXG)||32,523||2.15|
|BioPharma Credit (BPCR)||29,467||1.95|
|iShares Global Water UCITS ETF (IH2O)||27,876||1.84|
|Digital 9 Infrastructure (DGI9)||25,752||1.70|
|Legal & General (LGEN)||25,734||1.70|
|Rathbone Global Opportunities (GB00B7FQLN12)||25,660||1.70|
|Baillie Gifford Japanese Smaller Companies (GB0006014921)||21,414||1.42|
|Blackrock Frontiers Investment Trust (BRFI)||17,666||1.17|
|Private equity fund||15,590||1.03|
|Randall & Quilter Investment (RQIH)||14,906||0.99|
|NS&I Premium Bonds||11,500||0.76|
|Bruntwood Bond 2 6% BDS 25/02/25 (BRU2)||8,160||0.54|
|Doric Nimrod Air Three (DNA3)||6,950||0.46|
|Lendinvest Secured Income 5.25% NTS 10/08/22 (LIV1)||4,000||0.26|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.
Joshua Collis, adviser at Courtiers, says:
Your overall asset base is well split between cash, bonds, property and equities, held in various investment wrappers. As a couple, you will also have a good level of guaranteed income from your state pensions and your DB pension.
When we are structuring an income, we always begin by trying to effectively use the available tax allowances to meet income needs. Plugging the gap in your state pension entitlement would give you a better guarantee of income, but would lock away that capital and remove flexibility in the early years. And a bird in the hand is better than two in the bush.
Creating a net income of £60,000 a year throughout your retirement should not be a problem and, because you hold your assets in a variety of investment wrappers, you could structure it in a way that maximises most of your available allowances. Your partner, for example, could access her stakeholder pension flexibly and draw down her tax free cash, as well as taxable income up to the value of her personal allowance via flexi-access drawdown. However, given the cash that you hold on deposit, you don’t need to do this immediately.
You are not able to access pensions until age 55 at the earliest. I do not know how liquid and accessible your bond and debt, and commercial property holdings are. This leaves your Isa holdings, which in isolation are not diversified enough to sustain a regular income in a volatile market (see chart).
The equity investments you hold have good value credentials. For example, our Courtiers UK Equity Income Fund (GB00BYXVV596), which looks for value businesses across the FTSE All-Share index, holds Legal & General (LGEN). Direct share holdings in the right companies can be an extremely profitable way of investing. But spreading this exposure and subsequently de-risking your portfolio would result in less volatility and, hopefully, fewer sleepless nights.
We believe that a global multi-asset risk-based investment approach is most effective. And in cases where profits and returns aren’t the driving factor, but a reliable and regular income is, active management should prevail. In theory, active management should help to protect your portfolio against severe downside while it remains active in markets.
You hold a large amount of cash which, considering the lack of income available to you before age 55, is not a bad thing. But with inflation likely to reach double figures and interest rates not keeping pace, the purchasing power of this capital is being eroded. I normally suggest to my clients that they hold six to 12 months'-worth of their expenditure in cash.
Until you can access your Sipp, your partner's pension, both your Isas and the cash on deposit are the best options for providing the income you need. De-risking assets such as the debt, loans and illiquid holdings in commercial property would free up this capital to be consumed.
When you can draw from your Sipp, and use your annual personal allowance for income tax, this will relieve the strain on your other holdings. The guaranteed income from your DB and state pensions allow you to be more liberal in your spending in the early years of retirement.
Speaking to a financial adviser who could do cashflow modelling throughout your retirement would be very useful for both of you.
Ben Yearsley, investment director at Shore Financial Planning, says:
Your current portfolio is different, but you're an experienced investor and have put it together thoughtfully. However, taking £60,000 – about 4 per cent of your investment pot – a year is probably a bit of a stretch at the moment because it's not entirely invested in equities and bonds.
You could be a bit more circumspect in the first year or two, and maybe rely on your cash reserves rather than drawing from the investment pot. You might also want to draw on your cash buffer during down years because its better to avoid taking out capital at such times.
Dialling down the risk level of your investments at your age is a mistake many make because you will probably live for another 30 years. Even though you do not have dependents to whom you wish to leave any residual estate, you probably still need a reasonable level of growth to combat the effects of inflation. So don’t dial down the risk of your investments just yet.
I agree that with widespread quantitative easing 60/40 equity/bond portfolios have been questionable. However, bond yields have already risen a lot this year and with the US 10 year Treasury nudging 3 per cent there may be an opportunity this year to buy these and lock into decent levels of income. Some bond managers I speak to think that 4 per cent is probable for the US 10 year Treasury, which would mean corporate bonds yielding about 6 per cent. This is pretty attractive if inflation comes back to near target. So starting to drip a bit into bonds now might not be a bad plan. Good options include AXA Global Strategic Bond (GB00BMZCH363). ETFs are not a good way to invest in bonds because they tend to be most heavily weighted to the biggest borrowers.
As for what could replace bonds in a 60/40 portfolio, infrastructure, and real and physical assets are possibly the answer. There has been an explosion of infrastructure and specialist property investment trust launches over the past few years and these could form the core of long term portfolios. Their underlying assets often have a degree of inflation protection built into their revenue streams.
You already hold Digital 9 Infrastructure, a newer breed infrastructure investment trust, but there are many others which invest in areas including solar, wind, hydro, supermarkets, care homes and social housing. But, to get broad exposure, I would access these via an open-ended fund such as ARC TIME UK Infrastructure Income (GB00BP50HT79), which invests in UK listed investment trusts and real estate investment trusts.
You could then compliment it with some smaller, more niche funds such as Digital 9 Infrastructure. Infrastructure investment trusts are generally expensive but some, such as Downing Renewables & Infrastructure Trust (DORE) and US Solar Fund (USF), aren’t on hefty premiums to net asset value. Alternatively, invest in First Sentier Responsible Listed Infrastructure (GB00BMXP3956) as a core long term infrastructure investment. It invests directly in the shares of companies involved with infrastructure rather than infrastructure investment trusts.
I still like commodities but go for a more unusual fund such as TB Amati Strategic Metals (GB00BMD8NV62). Decarbonisation and electrification will require lots of specialist metals and commodities, and, for example, this fund's largest holdings at the end of April included companies that produce Lithium which is crucial for electric vehicles. I don’t think that you have missed the boat as long as you invest for the long term.