- Alan wants a 4 to 5 per cent real annual return from his portfolio as he looks to retire in two years
- He also wants to ensure his portfolio is well balanced
£532,000 in a Sipp and Isa
Maximise growth ahead of retirement in two years
Alan is 71 and works part time as a management consultant. This brings in £30,000 a year, while a company pension he took at 60 and his state pension pay £26,000 a year between them. His wife has retired on a teacher's pension of £24,000 a year and will receive her state pension in a couple of years.
"I started investing in the Thatcher years with the privatisation of BT, British Gas and the utility companies – these investments did very well and I have been hooked ever since," Alan says. "Over recent years as my financial situation has improved I have taken investing a lot more seriously and moved all my investments into a self-invested personal pension (Sipp) and individual savings account (Isa)."
Alan wants to grow his portfolio further, noting: “I would like to achieve a 4 to 5 per cent real annual return on my investments so that I can take £10,000 a year from my Isa when I fully retire in approximately two years’ time. I will leave my Sipp intact to reduce our inheritance tax liability.” However, he wonders about his investment strategy and the composition of his current portfolio.
"A year ago I moved both my Sipp and Isa to Interactive Investor to reduce fees and wonder whether I should focus more of my investments on low-cost trackers rather than actively managed funds," he says. "My investments are in what I hope is a reasonably well balanced portfolio which will be held for long-term growth. I am a little concerned that the vast majority of my portfolio is in the higher-risk growth areas and feel I need to rebalance by investing in more value-focused assets and would welcome your thoughts on how this might be achieved.
"I now invest most of my earnings into my Sipp and when I think the market has bottomed out will invest the available cash in a world tracker and an investment trust focused on value rather than growth. As we have a reasonably secure income and no immediate need to access my portfolio I am reasonably relaxed about risk and have seen my portfolio drop by best part of 20 per cent this year – but would get a bit worried if it dropped another 20 per cent."
His last three trades were to sell Rio Tinto (RIO) and to invest in Stewart Investors Asia Pacific Leaders Sustainability (GB0033874768) and Augmentum Fintech (AUGM).
Alan and his wife have a house worth £1mn with no mortgage and the couple will "probably downsize" in two years and move to be nearer their two children, something that Alan expects to liberate between £200,000 and £300,000. My wife has her own savings of approximately £150,000, but the two keep their savings totally separate and have no input on each other's investment decisions.
|Alan's full portfolio|
|Investment||Value (£)||% of Isa|
|L&G UK Index Trust (GB0001036531)||46,155||24.9|
|International Biotechnology Trust (IBT)||17,511||9.4|
|Baillie Gifford Japan (BGFD)||14,906||8.0|
|Worldwide Healthcare (WWH)||14,171||7.6|
|Scottish Mortgage Investment Trust (SMT)||12,326||6.6|
|Janus Henderson European Focus (GB00B54J0L85)||12,123||6.5|
|First Sentier Global Property Securities (GB00B1F76N79)||10,838||5.8|
|L&G European Index (GB0002041142)||7,773||4.2|
|Allianz Technology (ATT)||7,060||3.8|
|Blackrock Throgmorton (THRG)||7,050||3.8|
|Sylvania Platinum (SLP)||6,287||3.4|
|Edinburgh Worldwide (EWI)||6,166||3.3|
|Baillie Gifford Shin Nippon (BGS)||5,589||3.0|
|HydrogenOne Capital Growth (HGEN)||3,804||2.0|
|Lloyds Banking Group (LLOY)||3,474||1.9|
|Schroder UK Public Private (SUPP)||1,840||1.0|
|Investment||Value (£)||% of Sipp|
|Blackrock World Mining (BRWM)||25,955||10.6|
|Lindsell Train Global Equity (IE00B644PG05)||17,664||7.2|
|Fidelity Emerging Markets (FEML)||15,831||6.5|
|abrdn Global Smaller Companies (GB00B777SP34)||15,463||6.3|
|HGCapital Trust (HGT)||14,950||6.1|
|Augmentum Fintech (AUGM)||14,187||5.8|
|HICL Infrastructure (HICL)||11,966||4.9|
|Fidelity China Special Situations (FCSS)||11,634||4.8|
|Impax Environmental Markets (IEM)||10,544||4.3|
|iShares Global Corporate Bond UCITS ETF (CRPS)||10,059||4.1|
|Liontrust Latin America (GB00B909HH53)||8,131||3.3|
|Montanaro European Smaller Companies (MTE)||8,717||3.6|
|Oakley Capital Investments (OCI)||18,666||7.6|
|Rathbone Global Opportunities (GB00B7FQLN12)||18,780||7.7|
|L&G ROBO Global Robotics & Automation UCITS ETF (ROBG)||6,021||2.5|
|Stewart Investors Asia Pacific Leaders Sustainability (GB0033874768)||19,881||8.1|
|Vietnam Opportunities Fund (VOF)||10,219||4.2|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.
Samantha Owen, director at Beckett Asset Management and Jenny Williams, chartered financial planner at Beckett Financial Services, says:
While it sounds like you are comfortable with risk, given you have built up a sizeable portfolio, you should ask yourself if you need to continue to take so much risk.
You believe your portfolio is balanced with a growth focus. There is definitely a growth bias which is why the portfolio has been hit too hard recently as the markets struggle to re-price in the face of inflation, rising interest rates and lower growth.
The portfolio is diversified in terms of number of holdings, nearly 40, and reasonably well diversified in terms of geographies, but not really in terms of style or asset class. Only 23 per cent of the portfolio invested is non equity, but even the small property exposure is listed property. So, in the short term, it can correlate heavily with equity markets. Bricks and mortar property funds, while more illiquid, offer greater portfolio diversification so you could consider adding at an appropriate weight.
Approximately just under half of the portfolio is invested in high-growth, thematic and private equity type investments. Also, nearly half the holdings are under 2 per cent in size so their impact on the portfolio is limited. There is an opportunity to increase the true diversification of the portfolio and, if you are cost-conscious, more passives could be used – but we would remind you that passive funds will never beat the market and you need to know exactly what you are tracking. A lot of market cap-weighted trackers end up skewed very much to the dominant companies. When you see fund performance, it is net of fees so it’s best to look for value for money and the best risk-adjusted returns, not just the costs.
Typically funds which are more income-oriented, and large cap-focused, particularly in the UK, tend to be more 'value' in nature so increasing the exposure to UK equity income funds would reduce the growth bias.
Beyond taking £10,000 income in two years’ time, what are your long-term financial objectives? Having built up the value of your investments over many years, you may wish to consider the impact of IHT on your estate.
Based on the combined value of yours and your wife’s non-pension assets and making allowance for a combined nil rate and residence nil rate band of £1mn, the tax bill could be around £148,000 on second death.
Taking income from Isas to reduce the taxable value of your estate is wise. I also suggest that you and your wife review your wills and write lasting power of attorney documents. The latter will ensure someone you trust can manage your investments on your behalf, should you lose mental capacity.
A large part of the value of your estate is currently tied up in the value of your property but when you downsize you may wish to use the cash released towards IHT planning measures. Options include gifting, where the amount is outside your estate after seven years, or investments which qualify for Business Property Relief and are outside of estate after two years.
James Hymers, wealth manager at Raymond James Spinningfields, says:
Sipps and Isas are very tax-efficient because any interest/dividends generated within the wrappers are exempt from income and capital gains tax. This is regardless of your income levels; however, the downside is that contributions into these wrappers are limited.
Tax-relievable contributions into your Sipp are capped at 100 per cent of your part-time earnings (£30,000) so investing most of your part-time earnings into the Sipp seems sensible as long as there are no lifetime allowance considerations. Also, if you are enrolled onto the workplace pension scheme then by increasing your contributions via salary sacrifice it provides your employer with a National Insurance saving (15.05 per cent) which they may be willing to pass on/add to the contribution at no additional cost to yourself. Separately, your wife should request a state pension forecast as this will confirm her current entitlement and highlight if there are any gaps in her National Insurance record which could be filled by making class 3 contributions to bolster her state pension income.
The effectiveness of Premium Bonds should be considered as with average luck your likely annual winnings based on £14,720 is £175 which equates to an annual return of 1.2 per cent. The annual interest payable on today’s best easy access savings accounts is closer to 1.5 per cent so would appear favourable unless the balance was invested in the Isa which has the potential to provide returns in excess of inflation – as both Premium Bond and cash-based investments are losing their value in real terms.
Your wife's current cash balance of £150,000 exceeds the Financial Services Compensation Scheme (FSCS) limit, and £65,000 of her capital is not protected. It is important to keep cash holdings to a maximum of £85,000 per investor per institution.
The portfolio has a significant bias towards growth assets over defensive assets. Approximately 78 per cent of the portfolio is allocated to equity (growth) along with 11 per cent held in private equity/hedge funds (growth). Given your investment objectives to achieve a 4 to 5 per cent real annual return and to reduce your growth bias, you could look to introduce more defensive assets into the portfolio, which in turn should reduce volatility and still offer the opportunity to meet his targets.
The portfolio currently has a small weighting to fixed income (defensive) of 2.3 per cent, which we agree with given the current economic environment. We prefer and believe there is scope within the portfolio to gain defensive asset exposure elsewhere. We have focused on alternative, uncorrelated assets in the property, renewable energy and infrastructure sectors – some of which you already have exposure to. The drivers of returns in these sectors are different to those of wider equity market returns.
Returns in property are often contractually linked to inflation and asset values tend to be more stable than equity markets. Renewable energy has had a fantastic H1 due to exposure to the power price which has moved higher on supply issues due to the Russia/Ukraine situation. Infrastructure returns are normally inflation-linked whilst net asset values are linked to very long term bonds rather than shorter term bonds.