Join our community of smart investors

Am I taking too much income in retirement?

An investor weighs up the best allocation and drawdown rate
Am I taking too much income in retirement?
  • An investor needs to generate a good level of additional income until the state pension kicks in
  • She plans to adopt a withdrawal rate of 5 to 6 per cent a year for the next six years
Reader Portfolio
Jill 60

A portfolio of roughly £215,000, plus £250,000 from a property sale


Provide an income in retirement, with no need to leave an inheritance

Portfolio type
Investing for income

Jill is a 60-year-old retired teacher with an income of around £9,000 pounds a year from her work pension. She expects to take her full state pension in seven years. Her current spending is around £30,000 a year and she plans to take a more substantial sum from her portfolio until her state pension starts. She and her partner live in a mortgage-free property. She has no dependents or debt.

She has just sold her former main residence and expects to realise a cash sum of around £250,000, which she will add to her existing holdings. Jill’s home belongs to her partner and is worth £500,000.

Each year she sells the holdings from her portfolio with the biggest capital gains to put them into an Isa without crossing the capital gains tax (CGT) threshold. The non-Isa assets are held in a trading account.

Her partner expects a similar income in retirement. Apart from a joint account to which they each contribute about £6,000 to cover common expenses such as groceries, council tax and utilities, they prefer to keep their financial affairs independent.

Around half of Jill's portfolio is currently in Isas and she adds to that every year, as permitted.

The strategy for the portfolio is to keep the majority in equities, reflecting the geographical split of the world index funds, but to have some defensive holdings such as Capital Gearing Trust (CGT) and Personal Assets Trust (PNL). With the better-researched US and UK markets, Jill invests in low-cost index ETFs. For other markets, she uses active managers and reviews their performance regularly. The objective each year is to rebalance the geography of the portfolio to the original percentages.

With the new cash from the sale of the house, she would expect to keep the next three years of her spending, around £60,000, in cash to avoid any forced sales during market downturns. The expectation is that she will drip-feed the other proceeds of the house sale into the market over a three-month period, so the current correction in the market is quite useful.

The objective of the portfolio is to provide an income in retirement. Currently Jill plans to draw between 5 and 6 per cent a year for the first six years and then drop that to around 4 per cent from the age of 67. She has no particular need to leave an inheritance for others.

Given 3 per cent growth in her portfolio, Jill expects it to decline by around £70,000 over the coming six years and then at a lower rate. Although the initial drawdown rate is higher than normally recommended, she feels she is more likely to be active in these years and is prepared to have a more sedentary lifestyle in later retirement.

She is concerned that even with taking gains every year and moving funds into the Isa she may become liable for tax on either capital gains or dividend income at some stage.

Jill wonders if her drawdown plan is too aggressive, whether a focus on equities with a three-year cash reserve is also too aggressive, and whether there is a role for bonds in the current market. She also asks if a Sipp can serve as a tax shelter.

Jill's portfolio
HoldingValue (£)% of the portfolio
iShares Core S&P 500 UCITS ETF (CSP1)59,238.6627.6
iShares Core FTSE 100 UCITS ETF (ISF)28,365.8813.2
Jupiter European (GB00B5STJW84)21,009.269.8
Capital Gearing Trust (CGT)18,022.408.4
Baillie Gifford Japan Trust (BGFD)16,628.347.7
Personal Assets Trust (PNL)16,0647.5
Schroder AsiaPacific (SDP)10,934.985.1
JPMorgan Emerging Markets (EMG)8,464.143.9
Vanguard FTSE 250 UCITS ETF (VMID)7,3983.4
HSBC FTSE 250 UCITS ETF (HMCX)4,334.722.0



George Steger, senior wealth manager at Investment Quorum, says:

Given your assumptions, the drawdown plan appears reasonable. The starting point for any drawdown should be having a reasonable cash buffer. When drawing on assets, this should be higher than when you are accumulating. It is common to draw high sums prior to your state pension kicking in, however financial discipline is required to ensure you reduce your drawing rather than embracing the income to spend more.

Having said that, as you have no dependents you intend to leave assets to you could probably endure some capital erosion.

In regards to your concerns around tax, being efficient is important to make sure your assets work for you. However, do not let the tax tail wag the investment dog. With the very large caveat that rates could easily change, at 10 per cent CGT is not particularly aggressive, especially compared to income tax.

A Sipp is not going to add much efficiency. You can only contribute the lower of £40,000 or your relevant earnings. Pension income is not relevant earnings and so the maximum contribution you could make is £3,600, which is not going to swing the dial.

Your portfolio appears consciously constructed. Your home market bias to the UK is considerable compared to your intended world index geographical weighting. 

You could consider some diversity as you deploy new monies, and with this look to bolster your income generation and boost your total return profile (while providing efficient income to draw – at 7.5 per cent dividend tax). This could be provided via infrastructure or real asset equities. The Sanlam Real Assets fund (IE00BJ5CB555) invests in a range of companies that derive their value from underlying real assets – ones that have value due to their substance and properties. Its holdings benefit from contracted revenue streams. Furthermore, a high level of these contracts contain inflation linkage, which is obviously a benefit with inflation at levels not seen for 40 years, and would help provide some defensive equity exposure should it persist longer than expected.

The “there is no alternative” approach to equities may be waning and bonds may have their day again at some point soon. With rates continuing upward, bonds should be able to provide investors with yield and diversification benefits for the first time in a while. We would lean toward the defensive end of bonds while the extent of rate rises remain uncertain and suggest a fund such as Royal London Short Duration Credit (GB00BJ4KW792), which could provide diversification while delivering a roughly 3 per cent yield.

You may be questioning the overall risk of the portfolio but, as you say, the market sell-off is quite useful and could provide the opportunity to buy great businesses at far more attractive prices. If you want further global growth exposure, we continue to like Liontrust Global Innovation (GB0030679053). While the clue is in the name, the fund managers run this strategy with a different type of focus on ‘innovation’ than many of their peers – focusing across the whole market as opposed to the much narrower strategy of tech investing.

We particularly support the thesis of the managers, namely that while not every great innovation is a great investment, the successful innovators create value for their customers through the best – or, importantly, the most cost-efficient – products. As such, you see names such as Costco (US:COST) and Planet Fitness (US:PLNT) complementing the innovative names you might expect to see.


Daniel Evans, financial planner at First Wealth, says:

Holding three years’ worth of expenses in cash, while sensible, could be viewed as excessive. Holding two years’ worth of cash as an emergency fund would be sufficient and would allow you to invest £20,000 more for a greater return. This would improve the likelihood that the portfolio could sustain the withdrawals you wish to take in retirement. This will leave £230,000 to invest, giving a total portfolio size of circa £415,000.

Before you start to receive your state pension, you will need to raise £21,000 net from the portfolio to meet your £30,000 lifestyle costs, which equates to a withdrawal rate of 5 per cent for seven years. The recommended withdrawal rate from a portfolio while preserving its value over a long period of time is 4 per cent a year. This means that in early retirement you will be drawing slightly more than recommended. However, once your state pension starts paying out, you will only need to draw around £13,000 net, which is just over 3 per cent. This should help to maintain the value of your portfolio throughout retirement.

The 3 per cent a year growth figure quoted seems low considering the high equity content, and so I would expect the figure to be higher on average, again leading to the likelihood that your portfolio retains its value over time.

The biggest threat to your drawdown strategy is sequence risk, which is when withdrawals are made from a portfolio that has dropped in value during the early stages of retirement. Were this to happen, it would be a huge ask for the portfolio to recover sufficiently to last for the rest of your life. In this event, I would recommend that you draw on your emergency cash fund until the market recovers and you are able to replenish the cash from your portfolio.

Providing you understand the characteristics of equity investing and keep emotions in check when the market is turbulent, there is no real need to invest in bonds as this will take potential returns off the table. The main job of a bond allocation in a portfolio is to soften the blow of market volatility, but this is at the sacrifice of potentially higher returns. However, this needs to be balanced with an individual's attitude to risk. If holding bonds will lead to a lower likelihood of panic selling during a market crash and will encourage better investor behaviour, there could be a case made for holding them.

Given your circumstances, there is no real reason to open a Sipp as you have no income that you can offset the tax liability against by making pension contributions. The income you receive from your pensions does not count for this purpose, so you would be limited to contributions of £3,600 gross a year. It is not altogether clear from the information provided, but it does not appear that you will have a substantial inheritance tax (IHT) issue, meaning you will not benefit from the IHT shelter that pensions offer.