‘Is £1.4mn enough to retire on while taking three holidays a year?’

Edward and Marie are 61 and 56 and run their own business, bringing in up to £70,000 a year in income. The couple want to step back from work and have amassed a £1.4mn portfolio of pensions, individual savings accounts (Isas) and property to help them meet their goals. They also want to help their four children, while ensuring they mitigate any nasty inheritance tax (IHT) bills.

While well-funded, their situation is complex. Edward thinks they need £3,000 a month once they retire to get by, plus money to enjoy life, such as going on three holidays every year, meaning a £45,000 annual income. However, there are debts to clear first. He says: “We intend to transition into retirement, but first we want to pay off the £8,000 mortgage on our business premises and also quickly reduce the £140,000 mortgage on our home by 2028, by making overpayments. After that, I estimate we will need our pensions to generate £12,000 a year in income while growing at least with the rate of inflation. We also want to help our children financially sooner rather than later, to reduce any IHT bill.”

The couple both have large pension savings. They are still contributing, with Edward putting just over £1,300 into three of his pensions each month, while Marie adds £985 a month into her self-invested personal pension (Sipp). Combined, they have £629,000 spread across six different accounts: £527,000 in their two Sipps and £102,000 in workplace, with-profits and former Equitable Life pensions.

“We had hoped to transfer our old workplace pensions into our Sipps,” Edward says, “but our provider would not let us.”

“We used a financial adviser but stopped two years ago because of the £350 a month in fees and disappointing investment returns.”

The last time the couple added to their stock and bond investments was in February 2022, when they increased exposure to US stocks and their Vanguard LifeStrategy holdings. Since then, all new contributions have gone straight into cash. However, with retirement on the horizon, Edward wants to know whether it’s time to dip his toe back into the market and is curious about which funds to add. He’s considering the Guinness Global Energy Fund (GB00B56FW078) and also wants more exposure to emerging markets, as well as income funds such as City of London Investment Trust (CTY). “Our attitude to risk is at the lower end of the scale, but we would like our investments to grow at a better growth rate than cash to keep its value close to the current level,” he says. The non-Sipp pensions are invested in readymade multi-asset funds.

When it comes to property, the outstanding £140,000 mortgage, which they want to clear as soon as possible, is borrowed against the couple’s £1mn home. They also own a rental property worth £250,000 with an interest-only mortgage of £126,000, which brings in £418 a month after a mortgage repayment of £232. They are open to selling the rental home.

Then there is their business property worth £600,000 with only £8,000 left on the mortgage. Once they retire and stop actively using the premises, they estimate it could be leased for £50,000 a year, which, if possible, could help cover their income needs.

However, with plans to draw on their assets very soon, Edward is concerned the investment portfolio is not suitable. “Can we make adjustments to them now – during volatile markets – that would be beneficial over a short time period?” he asks.“We want to dispose of holdings that are no longer useful and reinvest in funds better aligned with our objectives. Should we add exposure to any sectors and do we have too much in some sectors? Also, do we have too many funds? As we want to enjoy retirement, we’d want to keep the funds to a sensible number and keep charges to a minimum,” he says.

Marie also has an Isa, which the couple want to invest in a way similar to way to their pensions. “It is currently entirely invested in Legal & General Active Sterling Corporate Bond Fund (GB00B0CNHD88).” The couple also have £44,000 in cash to cover emergency funds.

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

Ben Yearsley, investment director at Shore Financial Planning, says:

Readers often wish for a low-risk portfolio but are attracted to high-risk funds: and this week is no different. The Guinness Global Energy fund is a bold choice.

The first thing I would do is consolidate pensions – it just makes managing finances a lot easier. The only caveat I would add is to make sure you check that there aren’t any guarantees you will lose. It could also be time to build up Isas; currently, Marie has £14,000 and Edward none. 

With a combined pension pot of £630,000, taking £12,000 annually is fairly modest – less than 2 per cent annual yield. If you assume 6 per cent annual growth, taking 2 per cent as income gives the capital a chance to match inflation. However, one mistake many make when starting to draw down their pensions is to de-risk too soon. You are 61 and 56 – I was at a coronation party over the weekend where one of my neighbours has witnessed five monarchs... so your pension pots may need to last 30 years or more on that basis.

You have about 32 per cent invested in bond funds, plus another 13 per cent in property and a tiny bit in ‘with profits’, with half in stocks. Taking your low-risk comment at face value, you have too much invested in real assets and shares and need to increase their allocation to bonds. However, taking your comment about the portfolio growing with inflation after taking the 2 per cent income, you should reduce your bond weight. It depends which statement is more important to you. I would suggest you aren’t necessarily low-risk investors when you look at the portfolio, so I would trim the bonds.

You should have about 70 per cent in stocks, 25 per cent in bonds and 5 per cent in property – however, as you already have a large amount invested in your own commercial property I would suggest it isn’t needed in their pensions. So a 75/25 stocks/bonds split is fine.

Dealing with the bond portfolio first: I would keep the L&G All Stocks Index Linked Gilts and the Vanguard UK Investment Grade Bond Index and add in a couple of active funds to take the bond portfolio up to a 25 per cent weight: Axa Global Strategic Bond (GB00BMZCH470) and Ninety One Global Total Return Credit (GB00BK80VC04). I would sell all the other bond funds. 

I would also sell the iShares Environment & Low Carbon property index tracker, as you have a large amount in commercial property already. On the equity funds, I would keep Vanguard UK Equity Income Index and increase the weight to 10 per cent and make it a core holding. I would sell all the other funds. I would add the Vanguard LifeStrategy 100% Equity (GB00B41XG308), accounting for 25 per cent of the portfolio – that would then leave about 40 per cent to split between some new funds and trusts. 

Bearing in mind your conservative approach, I would invest 10 per cent in either Personal Assets (PNL) or Troy Trojan fund (GB00B05KY352), depending on whether you prefer funds or investment trusts. This will boost the bond weight but help with matching inflation over the long run. I’d also have 10 per cent in First Sentier Responsible Listed Infrastructure (GB00BKP85030) – which adds income, capital growth and an inflation-matching element.

With the final 20 per cent I would add specialist funds – each at a 5 per cent weight. You seem to like Asia and Europe, so two funds to consider are FSSA Asia Focus Fund Class (GB00BWNGXJ86) and Martin Currie European Unconstrained (GB00BP9LK978). I don’t have a problem with the Guinness Global Energy – it is higher risk, though, and are you comfortable with that? If so, then add 5 per cent in that.

Finally, TIME UK Infrastructure Income Fund (GB00BP5GQF49) – which invests in a portfolio of investment trusts with a lot in areas such as renewable energy – is both income-yielding and inflation-proofing.

Dennis Hall, chartered financial planner at Yellowtail Financial Planning, says:

You need to ensure you are as tax-efficient as possible when you retire. You estimate that letting the commercial property could generate £25,000 for each of you a year and two state pensions could each add £21,200 a year in today’s terms, giving them more income than you need. This would allow you to be flexible in terms of drawing from their personal pensions, which is beneficial because whatever is left can pass onto the children IHT-free. However, you should both obtain state pension forecasts to figure out what you will receive. This is important as itmay be the only guaranteed income you have.

That being said, until your children have specific objectives and needs, you should focus on setting yourselves up well for retirement. In the short term, you could use any disposable income or some of the cash assets to help their children. Although adding children to the pension death benefits via an expression of wishes form will also enable money to be passed down more easily.

Onto the Isa. Being invested in any individual fund, such as Legal & General Active Sterling Corporate Bond, which Marie holds in her Isa, is not a problem as long as it is performing as you want. Unfortunately, over the past two years, this fund has fallen significantly, primarily because interest rates have increased significantly and the underlying assets have fallen. So using this Isa money to pay off the mortgage on the business property makes sense. With rising interest rates, using the future sale proceeds of the rental property to pay off the mortgage on the main home would also be a good move.

Over the past 30 years, cash and inflation have been broadly matched. Bond values have slightly outperformed both of these, however equities have significantly outperformed them all. So you should split your pension funds into three investment strategies to cover income needs in retirement. The first three to five years of money could be in lower-risk assets, such as bonds and cash. The next five to seven years’ money could be invested at a medium level of risk, with either 40 per cent or 60 per cent of it in equities. Money you won’t need for at least 10 years should be invested with a higher level of risk to do the heavy lifting and grow the portfolio for the longer term.

You should also stop waiting for the right time to invest the cash in their pensions, you might miss the eventual rise that normally follows large falls. You should drip-feed money in over a number of months if this makes you feel more comfortable.

Consolidating your various pensions may make sense, bearing in mind some pensions have guarantees that can be lost when transferred. Having your pensions in one place means you can have one unified investment strategy, potentially lower the charges, and make withdrawals simpler and easier to administer. 

Nick Onslow, chartered financial planner at Progeny, says:

The couple need to ensure they are as tax-efficient as possible when they retire. They estimate that letting the commercial property could generate £25,000 for each of them a year and two state pensions could each add £21,200 a year in today’s terms, giving them more income than they need. This would allow them to be flexible in terms of drawing from their personal pensions, which is beneficial because whatever is left can pass onto the children IHT-free. However, they should both obtain state pension forecasts to figure out what they will receive. This is important as it may be the only guaranteed income they have.

That being said, until their children have specific objectives and needs, Edward and Marie should focus on setting themselves up well for retirement. In the short term, they could use any disposable income or some of the cash assets to help their children. Although adding children to the pension death benefits via an expression of wishes form will also enable money to be passed down more easily.

Onto the Isa. Being invested in any individual fund, such as Legal & General Active Sterling Corporate Bond, which Marie holds in her Isa, is not a problem as long as it is performing as they want. Unfortunately, over the past two years, this fund has fallen significantly, primarily because interest rates have increased significantly and the underlying assets have fallen. So using this Isa money to pay off the mortgage on the business property makes sense. With rising interest rates, using the future sale proceeds of the rental property to pay off the mortgage on the main home would also be a good move.

Over the past 30 years, cash and inflation have been broadly matched. Bond values have slightly outperformed both of these, however equities have significantly outperformed them all. So they should split their pension funds into three investment strategies to cover income needs in retirement. The first three to five years of money could be in lower-risk assets, such as bonds and cash. The next five to seven years’ money could be invested at a medium level of risk, with either 40 per cent or 60 per cent of it in equities. Money they won't need for at least 10 years should be invested with a higher level of risk to do the heavy lifting and grow the portfolio for the longer term.

They should also stop waiting for the right time to invest the cash in their pensions, they might miss the eventual rise that normally follows large falls. They should drip-feed money in over a number of months if this makes them feel more comfortable.

Consolidating their various pensions may make sense, but seek professional advice on this, as some pensions have guarantees that can be lost when transferred. Having their pensions in one place means they can have one unified investment strategy, potentially lower the charges, and make withdrawals simpler and easier to administer.