'I want to retire – how do I sort out my £1.6m portfolio?'

Raj is 64, earns more than £110,000 a year and receives a defined benefit (DB) pension of around £6,000 a year. He lives with his partner who is financially independent of him. His children have left home and are also financially independent. His home is worth about £700,000 and is mortgage-free.

"I would like to retire in the next year," Raj says. "When I reach age 65, I will start to receive a second DB pension which will also pay out about £6,000 a year, and a tax-free lump sum of about £25,000. I don't need the cash, but will consider taking it because if I don't, I will receive a higher taxable income.

"My two DB pensions and, from age 66, the full state pension will cover most of my basic expenses of around £25,000 a year. And I will draw £15,000 a year from my savings and investments to cover discretionary spending such as travel costs. If I need care in later life I will draw money from my pensions and, if necessary, my home.

"I hold cash for unexpected expenses and am considering moving £50,000 of it into NS&I Premium Bonds. Also, after I retire, I will add £20,000 of cash into an individual savings account (Isa) each year. I may have too much cash but I don't know how to strike the right balance between maintaining the long-term value of my savings and the risk of investing cash in the market now. As I will have secure income from my pensions, I would like my assets to gradually grow with moderate investment risk.

"I invested in index-linked gilt and strategic bond funds to give my investments some stability when equity markets fluctuated. But these funds have not performed well for a number of years, and I want to know how else can I give my portfolio some stability?

"As well as two DB and two defined contribution (DC) workplace pensions, I have a self invested personal pension (Sipp). These pensions' value has breached the lifetime allowance, but I have continued to fund them to keep my taxable earnings below £100,000. I have also considered investing in venture capital trusts (VCTs). But, given they have a minimum five-year holding period, I wondered whether it was suitable given my age.

"Although I enjoy investing and keeping up with the markets, I would like to rationalise the bulk of my investments into a few core holdings, aimed at capital preservation and some growth. Alongside these, I would like to put 20 to 25 per cent of my investments into more adventurous holdings."

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

Doug Brodie, managing director of Chancery Lane Income Planners, says:

Income of more than £100,000 a year is in part taxed at 60 per cent because for every £2 of income over that amount, £1 of personal allowance is removed. So pay at least £10,000 gross into pensions each year, as the lifetime allowance is due to be abolished.

Your current net worth is about £2.3m, so if you are not married to your partner, consider doing this so that HM Revenue & Customs will not be the biggest benefactor of your estate. As things stand, if you die £260,000 of your assets would be lost to inheritance tax. Also ensure that you have a lasting power of attorney and will in place.

If you want to guarantee your income in retirement, you could take your pensions £268,275 tax-free cash and use £879,000 to buy a Retail Price Index-linked annuity which, for this amount, could pay out about £39,800 a year. Together with your state and DB pensions, you would have an inflation protected income of £62,400 gross or £45,241 net a year. You could plug the gap until you start to receive the state pension with cash savings. This would cover your annual expenses while leaving £170,000 to invest in Isas and £250,000 cash.

If you don't want to put all your pensions money into annuities, and are already due to receive inflation protected income of about £23,000 a year from state and DB pensions, you could consider buying annuities of a value that will pay out guaranteed income of, say, £7,000 a year. 

But even without buying an annuity, you could still easily meet your income objective. You're trying to generate roughly £20,000 net a year from liquid assets worth about £1.6m. You could, for example, meet your goal by putting some of your money into a cash account with an interest rate of 4 per cent. If an investor needs, say, a 4 per cent return and there’s a deposit account paying that amount, it should be used unless you have a relevant reason not to. Too many people invest without a specific objective so are applying risks they don’t need to take.

Our software suggests that when you retire, you could probably start with an annual income of £78,000 net a year wand grow that at 3 per cent a year for the rest of your life, though this would mean running down your capital.

Core holdings for reliable income in retirement should include investment trusts. F&C Investment Trust (FCIT), for example, would provide a solid slug of growth assets including a small allocation to unquoted assets.

Your pension assets are largely not income focused so I suggest holding 12 to 15 general and equity income trusts for stable income. And you could keep £200,000 in existing holdings such as Fundsmith Equity (GB00B4MR8G82), Baillie Gifford Pacific (GB0006063340) and Slater Recovery (GB00B90KTC71) as adventurous investments.

Sell the bond funds, and replace Fidelity Global Focus Pensions (GB00B0XQ2W02) and Aviva Pension BlackRock World (Ex-UK) Equity Index (Aquila HP) (GB0033757724) with trusts such as City of London Investment Trust (CTY), Lowland Investment Company (LWI) and Merchants Trust (MRCH).

At the point you retire, transfer your two DC workplace pensions into the Sipp and invest it as one portfolio.

As you don't need capital, use the pension commencement lump sum allowance to phase your income and reduce the taxable income from your pension. Take 25 per cent of what you need from pensions to meet your annual income requirements as pension commencement lump sum and 75 per cent as taxable income.

When interest rates fall, the price of bonds increases so that £1 of income from them represents a smaller yield percentage. And when interest rates rise, the capital value of bonds falls, as has happened recently. So to improve stability of income, invest in a fund such as Aviva Investors Monthly Income Plus (GB00B7RBPR66) or TwentyFour Select Monthly Income Fund (SMIF) which targets a monthly dividend of 0.5p per share and had a yield of about 8.7 per cent as of 14 April. 

Invest your Isas in the investment trusts mentioned above and draw sufficient tax free income from them to keep your taxable income below the £50,000 higher rate band threshold. 

Shane Bennett, head of investment strategy at Walker Crips Investment Management (WCW), says:

You want a more concentrated portfolio made up of holdings that achieve capital preservation and growth, alongside up to 25 per cent in adventurous investments. For the capital preservation component, you already have cash. I suggest keeping some of your assets in high interest cash accounts, but spread them across a greater number of banks [than you currently do] so that you do not have more than the Financial Services Compensation Scheme limit of £85,000 in one institution. Also consider some fixed interest exposure such as low-duration bonds and defensive alternative assets. 

I suggest changing the growth component of your existing portfolio so that it is diversified by asset class, region, sector and market cap. The adventurous section of your portfolio could include sector specific areas such as technology, regions such as emerging markets and smaller companies.

Your second DB pension is due to begin paying later this year but you are unsure whether to take the tax-free lump sum or forgo it for a higher income. If you do the latter, it will be taxable at your marginal rate. If you don't require the lump sum now, you could invest your current cash holdings and replace them with the tax-free lump sum. It is generally recommended that you hold cash worth three to six months of your living expenses as an emergency fund.

You hold index-linked gilt and strategic bond funds to offset downside in your equity investments. Although bonds have provided some insulation against equity market fluctuations in most instances, there are no guarantees that this will always be the case. In recent years, markets have been heavily impacted by a substantial rise in inflation which has been followed by an increase in interest rates. This dynamic has had an adverse impact on bonds which have not provided the same support when equities have fallen.

The best course of action is to maintain a highly diversified portfolio, and to reduce the overall bond duration and lower the interest rate sensitivity while interest rates are still rising. Also hold alternative assets which suit the current market environment by including exposure to areas such as infrastructure which can act as an inflation hedge due to inflation-linked cash flows.

You are considering investing in VCTs rather than topping up your pension. VCTs are exchange listed and usually invest in smaller companies with higher growth potential. They offer 30 per cent income tax relief if you hold them for at least five years, and are free from capital gains and dividend tax. 

But due to the [planned] abolition of the lifetime allowance, topping up your pension remains the best course of action. You will get greater income tax relief of 40 per cent on pension contributions. Your pension is outside your estate for inheritance tax (IHT) purposes. There are more attractive investment choices available within pensions with varying levels of risk and greater diversification. And you can access pensions now rather than having wait for five years if you want to get tax relief.

But if these benefits are less important to you, consider VCTs, particularly if you are more interested in higher growth potential.

After using your full Isa allowance, you want further ways to reduce the amount of money you have in bank accounts and are considering NS&I Premium Bonds. Also consider fixed-term deposits which typically pay a higher rate of interest in exchange for locking your cash away for a specified period, if you are unlikely to need the cash within that period. Another option is short duration government bonds (gilts) which are free from capital gains tax and, if you hold zero coupon bonds, income tax too.

Or you could invest in a money market fund of which the manager invests in a range of cash like securities.

Which type of cash assets you hold will ultimately depend on your need for accessibility and security, tax, and their charges and levels of return.