'I'm retiring, how do I sort out my £500,000 pension and Isa?'

Losing your job close to retirement can be challenging in more ways than one. But it can also prompt individuals to take stock of their circumstances and their investments.

Sue is 62 and finds herself in such a situation. It’s six months since she was made redundant, and she notes that “nothing suitable is available just yet” in terms of employment. With her job prospects uncertain, Sue would like to make sure her investment portfolio is as well diversified as possible, suits a medium-risk appetite and, ideally able to provide an income of around 4 per cent a year.

“I am looking at retirement I suspect, due to the job market,” she says. “I would ideally like to get my portfolio up to scratch. I was prepared to take a fairly risky approach but the reality of a downturn has changed that.”

She currently has around £340,000 in a personal pension and nearly £230,000 in an Individual Savings Account (Isa). Some £133,000 of the £568,000 in these accounts is in cash, however, with the rest spread across around 20 funds.

She worries the Isa and pension are overexposed to US stocks and to the growth investment style that has done so well in the past decade but suffered badly in 2022 as interest rates moved upwards. “I have somehow built a mountain of global growth funds I cannot see how I can unravel,” she says.

Like many investors Sue hopes she can diversify the portfolio, but at the same time wonders if it can simplified at the same time. With more than half her holdings focused on global equities and multi asset, it seems there is adequate scope for such tidying up.

She has also struggled to find the right way to diversify, saying that she recently sold out of the Axa Framlington Biotech fund (GB00B784NS11), noting “it was a stab at diversification I don’t think will make any impact”. The portfolios are heavily invested in quity funds but Sue wonders whether now is the time to move into the bond market, and what would be best to buy. “I am wary, I have avoided them,” she says. “But this seems the right time.” 

Sue and her husband John, also 62, are not without other assets. They have a mortgage-free residential property, while Sue also has a rental flat worth an estimated £300,000 and should receive around £10,000 a year from a workplace pension from the age of 65. Sue also has £50,000 in cash outside of her portfolios. John should receive the full state pension, whereas she should receive £2,000 a year less. 

Sue believes her husband has significant investment assets but the two keep their affairs private on this front. The pair also have a 24-year-old daughter and would "absolutely want" to get her on the housing ladder.

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

Rory McPherson, chief investment officer at MFDM, says:

You have a good mix of investments that are probably not a million miles away from where you want to get to. But there's still roughly 70 per cent in stocks, with a bias towards global and US shares via a fairly high number of different holdings. Some of these are at very small weights and many replicate one another.

Given the return target, it would make sense to look at bonds. You describe yourself as “moderate”, but this can cover quite a broad base. “Moderate” portfolios that we run have about 60 per cent in stocks with the remainder in bonds. It makes sense to have some cash to meet basic needs, but this shouldn’t form part of an investment portfolio.

I can understand why you are wary of the bond market (given the past three years), but there has been a massive reset and there are some fantastic opportunities. We favour short-dated bonds currently. These benefit from the unusual circumstances that has meant short-dated bonds yield more than longer-dated bonds. This means one has to worry a lot less about changes in market interest rates (bond yields) and as a result, there is much more stability in the return.

For much of the past decade, these investments yielded next to nothing, but now yield around 6 per cent. We favour Funds such as the Artemis Target Return Bond fund (GB00BJXPPJ80), the Axa Global Short Duration Bond fund (GB00BDFZQW47) and the TwentyFour Absolute Return Credit fund (LU1368730674).

We complement these with Blackrock Corporate Bond fund (GB00B4T5JV79), which is longer-dated and will benefit if inflation comes down and bond yields, which are currently at their highest level since 2007, fall.

You might also want to review your number of holdings. Put simply, there are a lot of them and a lot of replication. An engine room of global funds does make sense, but you don't need so many.

We like having a core allocation to global managers via Royal London Global Equity Diversified fund (GB00BF93WF36), Guinness Global Equity Income fund (IE00BVYPNY24) and L&G International Index Trust (GB00B2Q6HW61). This achieves really good global diversification and is then complemented with some structural themes such as infrastructure through the ClearBridge Global Infrastructure Income fund (GB00BMF7D555), decarbonisation through the Ninety One Global Environment fund (GB00BKT89K74) and regional specialists such as Pacific North of South Emerging Market All Cap Equity (IE00BD9GKZ43) and M&G Japan Equity (GB00B74CQP79). This gives excellent balance to the portfolios and helps complement the engine room of global managers.

You should also consider UK stocks as the market is extremely cheap (on a valuation basis) and also provides a good yield. Funds such as the Artemis Income (GB00B2PLJJ36) and Gresham House UK Multi Cap Income (GB00BYXVGT82) complement each other well and benefit from excellent teams and processes.

Poppy Campbell-Lamerton, private client director at 7IM, says:

You should think about what your estimated outgoings will be in retirement and what your required annual income might be from your investments. It would be a good idea to sit down with your partner and work out how much you might need in retirement and other costs, especially if you have mutual objectives such as helping your daughter with a property purchase. This will help give you a better understanding of what you are looking to achieve with your investments.

It would be sensible to think about your drawdown strategy and what pot you are going to draw on first, to support yourself in retirement. As you might be aware, your pension sits outside of your estate for inheritance tax (IHT) purposes, which means it can be a tax-efficient way of passing on wealth to your daughter.

As a rule of thumb for someone in a similar position, it might make sense to draw from your Isa in the first instance. This would mean that the time horizon for investing your pension is longer than your Isa, and therefore it may be better to take less risk with your Isa.

Looking at your investments, they are heavily weighted towards stocks, and many of the funds have a 100 per cent equity exposure. Such a high concentration isn't always suitable for someone who is about to retire, with a reduced tolerance for risk, who might be accessing their investments soon.

Your money is diversified across global stock markets which over the years might have done well for you, but as you saw in 2020 and 2022, they can also be quite unforgiving. Bond markets can also be difficult but after last year’s sell off, they look better value. Bond markets can help you to protect your capital. You have a lot of small holdings, this is arguably “over-diversification”. You could consider selling these smaller funds and diverting the proceeds into a globally diversified bond fund.

You mention you feel too exposed to “global growth funds” and you cannot see how you can unravel them. However, as your investments are within an Isa and a pension, you do not have any potential capital gains tax to worry about and so you have the flexibility to change your strategy.  

I notice you have a lot of cash in both portfolios. If you decide to access the Isa first, then it doesn’t make much sense to hold a lot of cash in your pension. You also need to think about how much you feel comfortable holding in cash, As you have £50,000 already outside your investment accounts, you could look to invest the rest. For the cash you decide to hold, you could look to use a money market/cash equivalent fund or move some of the cash to an Isa, with better interest rates.