'Can I grow my pension pot to £400,000 in two years?'

A status-quo mindset can be surprisingly useful for investors, if it enables them to keep putting money to work with little thought on short-term market movements. But those hitting a life event ultimately need to take control and figure out a plan.

Jason, 61, has already made good progress on various fronts. He has a £217,000 personal pension and £108,000 in his workplace pension while earning £64,000 a year.

He also has a clear set of financial objectives ahead of retiring by December 2025, on his 64th birthday. He wants to grow his personal pension to £260,000 via contributions, reinvested dividends, tax relief and investment returns. He also hopes his workplace pension will reach a value of £140,000, giving him a total of £400,000. He currently manages to save £1,000 into his personal pension and puts another £1,000 into his workplace account, which is matched by his employer.

He and his partner, Luke, who is 53, also put £1,500 into Premium Bonds every month, adding to their already sizeable £37,000 holding. The couple live in their mortgage-free property, plus own a buy-to-let worth £300,000, which is also mortgage-free and provides £10,800 per year. Both Jason and Luke can also expect to receive the full state pension and have earned defined-benefit (DB) pensions which will kick in down the line (details in the table below)

But there are of course calls on this cash. By his 64th birthday, Jason would like to have "future-proofed" their home with solar panels, a battery and potentially an air source heat pump, as well as replacing windows, switching his car for an electric vehicle and building a £20,000 cash buffer.

Jason wonders how feasible all of this is, and also wishes to evaluate his portfolio. "Once I retire, my plan is to combine my workplace pension with my personal account and have the same allocation as it has now," he says. "But would this represent a sensible spread to achieve some growth and maintain or increase dividends with inflation?" He wants to draw down around 4 per cent a year, amounting to £16,000 at first.

"If I can achieve that, then the income from our investments, DB pensions, the rental, some part-time work until I reach the state pension age and our state pensions, could provide us with a [healthy] monthly net income," he says.

Like many self-directed investors nearing retirement, he also wonders whether it makes sense to hold more growth stocks and fund his lifestyle via capital gains rather than dividends.

Jason is prepared to take risk with his pension and lose up to 15 per cent in a year. He says the rental income, state pensions and lower-risk DB workplace pensions, which will eventually pay more than £56,000 a year, should provide something of a buffer.

Jason's current investment plan also involves drip-feeding in new cash every month, but some purchases are fairly modest and only worth around £75. "Am I losing an excessive amount on fees for the cost of the purchases?" he asks

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

Sheridan Admans, head of fund selection at Tillit, says:

You’re keen to understand the likelihood of your pension reaching a value of £260,000 by December 2025. Assuming zero growth, your total monthly contributions would take you to a valuation of roughly £250,000. On that basis, by a crude calculation, you need to achieve around 5 per cent growth in just over two years based on today’s value. This feels achievable, particularly given your portfolio is stocks-heavy.

You ask whether the investment approach is sensible. Well, you are definitely positioned for growth and mostly use investment trusts, also a valuable tool for income investors. This could smooth out your income return over time. One thing to note is investment trusts can behave like stocks in the short term, regardless of their underlying investments. So while roughly 30 per cent of your portfolio is allocated to non-stocks-based trusts (including infrastructure, property and bond assets), these won’t provide you with as much diversification as you might expect in the event of a market sell-off.

If you are keen to improve diversification, you may want to consider some open-ended funds which invest in non-stock assets such as bonds. While you appear to have a healthy appetite for and understanding of investment risk, once you are drawing from your portfolio it will probably be wise to diversify to reduce your portfolio's sensitivity to stock markets.

Options here include Allianz Strategic Bond (GB00B06T9362). While it is a stock-based portfolio, another I would mention is First Sentier Responsible Listed Infrastructure (GB00BMXP3956). This fund invests in companies producing products and services underpinning our daily lives, from transportation to energy distribution and toll roads, with a sustainable overlay. 

As to your predicament on aiming for growth or income, there is no right or wrong answer. Many investors still opt for income-paying assets in their retirement portfolios with much success, but I would highlight the importance of quality. There are plenty of investors, and indeed fund managers, who are so fixated on yields that they chase them at any cost. Successful income investors acquire high-quality, well-established and responsibly run companies that are well-positioned to pay a reliable dividend. Don’t lose sight of this.

You’re right to be concerned about transaction fees as they can make a considerable dent in your portfolio. It may be worth reducing the number of funds you’re investing in monthly to reduce transactions. Alternatively, it may be worth researching different providers as not all fee structures are the same. Given your taste for listed funds, you may want to explore platforms with lower dealing fees – some platforms don’t charge dealing fees at all.

Natalie Kempster, chartered financial planner at Argentis Wealth Management, says:

With just over two years left until retirement, now is a good time to think about ways to reduce calls on your income. Installing solar panels and a heat pump could save you money on energy bills. The cost of installation varies but typically ranges from £10,000 to £25,000. The amount of money you can save will depend on your energy consumption and location, but you can expect to save hundreds of pounds per year.

You also plan to contribute to your pension until you stop working. Your contributions will likely get you to where you want to be but may come up short of your goal of £260,000 if you adjust for inflation.

You have mentioned a 4 per cent withdrawal rate; this is a rule of thumb developed by William Bengen. However, this rule is now recognised as being quite limited and may not be safe for UK investors due to lower bond yields and higher equity valuations in the US. You should instead do a full analysis of your income needs, and risk tolerance. You estimate a net income requirement of £5,200 a month. You should turn that on its head and work out all expenditures, and then put them into the following categories: essential, discretionary and lifestyle. You can then include in a cash flow model reduced household cost, any employment, state pensions and rental income.

You should always secure essential income. Your DB and state pensions are likely to go some way towards meeting this. As you rightly say, this allows you to take more risk with your pension, especially if your tax-free lump sum is kept aside as short-term income in times of market volatility.

Your portfolio, which broadly tracks the main world index, would be considered aggressive. To be truly diversified, consider adding more funds. While this would add more costs, the diversification and investment expertise outweigh these. 

A typical growth investor asset allocation should be mainly stocks-based, with roughly 25 per cent in North America, 22 per cent in the UK and 12 per cent in Europe. Then there should be around 13 per cent in global bonds and 4 per cent in cash and short-term bonds.

I'd suggest HSBC American Index (CGB00B80QG615), one of the cheapest and most effective ways to hold US stocks, and Legal & General All Stocks Gilt Index Trust (GB00BG0QNV10). After a challenging time for gilts caused by rising interest rates, they potentially now offer enhanced value. We hold both these funds within our portfolios.

Your assumption that leaning towards income rather than growth protects the portfolio from market shocks is reasonable. Dividend-paying stocks are more likely to continue producing an income even during lean years. In a stock market crash scenario, the value of your pension portfolio may decline, but your dividend payments should remain relatively stable. However, it is important to note that dividends are not guaranteed. Therefore, it is important to diversify your portfolio and invest in a variety of dividend-paying stocks from different industries.