'I've consolidated my pensions – how should I invest my £1mn portfolio?'

Consolidating a series of pensions can instinctively seem like a good idea. The problem is that investors then need to decide how to invest.

Lance, 52, is on that journey. In 2019, he merged six dormant workplace and private pensions into one self-invested personal pension (Sipp) and decided to be a DIY investor. Two years later, he transferred his wife Jane's defined benefit pension into a personal pension for increased flexibility, calculating the transfer value was worth more than the income.

He has now amassed just shy of £500,000 in pension wealth in his own pot. His personal account has around £133,000 in it and, as Table 2 below shows, is invested in funds, but also plenty of individual shares and has companies that pay healthy dividends. However, Lance adds: "I think I am too exposed to individual companies in my pension and need better direction for picking funds". He also still has £361,000 invested in an Aviva workplace pension scheme.

Like many others, the growth of his assets has varied notably over the past few years. He grew a pot of £108,000 to roughly £155,000 until markets took a turn in late 2021. Lance says: "I initially thought it was easy, especially buying Tesla (US:TSLA) and selling at the top, reinvesting and making further gains. But my investing is now sporadic and reactive. My favourite mistake was selling Rolls-Royce (RR.) when chief executive Tufan Erginbilgiç called the company a 'burning platform'. I thought it was a 'Gerald Ratner' moment but the share price has doubled since then."

He now wants to know how best to invest his pensions to maximise growth between now and his 60th birthday, in around eight years' time. He and his wife also want to try to clear their mortgage, or at least overpay and reach a balance of £90,000 by January 2025.

Lance is happy to take risks and is also interested in moving his wife’s pension, currently invested mainly across True Potential funds, as the management fees are high. He would like half of the portfolio to be in “safe” assets, a quarter in more moderately risky assets and greater risk taken with the rest. He also wants to build up a £100,000 Isa by the age of 60. “I want to be more risk averse [with the Isa than with the pension] but want something more rewarding than using a cash Isa,” he says.

The ultimate desired outcome is a more balanced exposure – including adding missing regions such as Europe. He also worries he is overexposed to mining and oil but explains: "I have investments where the next dividend keeps me invested, or where losses have been made and I am hoping for a reversal before selling."

The couple’s home is worth roughly £700,000 with an outstanding mortgage of £140,000. That is currently on a 1.5 per cent five-year fixed rate, expiring in January 2025. While they do have £70,000 in cash, Lance’s wife has earmarked this sum for house improvements.

One final consideration relates to the couple's three sons, one of whom is 20 and working and two of whom are still at home. "We used to think that tax-free lump sums could pay off the mortgage at 55, but now we are more thinking that the more we grow our savings, the more we can support our children when then decide to become homeowners," Lance adds.

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

Alice Guy, head of pensions and savings for Interactive Investor, says:

As both of you are in your early 50s, it’s great that you’re starting to plan for retirement. You’ve managed to build an impressive portfolio and still have several years ahead to grow this.

You’re not sure how much income you’ll need in retirement, and this could partly depend on your decision about whether to fully retire at 60. Couples aiming for a comfortable retirement need a joint income of around £61,000 including the state pension, according to the PLSA retirement living standards. That means early retirees will need more private pension income than those retiring at the state pension age as the state pension is around £21,000 for a couple who both have a full entitlement.

When it comes to managing your investments, as you point out, your pension is heavily invested in individual shares and so could do with some fund additions to help capture parts of the investment world outside of your expertise.

As you’re looking for investment growth and willing to take some investing risk, three areas to consider are global smaller companies (where you currently have no allocation), technology (via a specialist fund) and emerging markets (where you also have nothing invested). These three areas historically outperform larger companies, although investment returns are not guaranteed.

For smaller companies, Abrdn Global Smaller Companies (GB00B777SP34) is worth a look. The fund has suffered as interest rates have increased, but manager Kirsty Desson believes that when the rate cycle peaks, the fund’s performance will improve as investors begin to look forward to interest rate cuts. A situation we are fast approaching. The fund is internationally diversified, with allocations to American, Japanese, UK and European shares.

For a broader global fund, that includes small stocks, another option is Invesco S&P 500 Equal Weight ETF (SPEQ). Every stock in the S&P 500 index is weighted at 0.2 per cent, regardless of how large or small the company is in the real world. Its unusual approach offers greater exposure to smaller stocks and those with lower valuations, providing a diversified approach to investing in US stocks, which could lead to potentially higher returns.

A possible option for technology is Polar Capital Technology (PCT), where shares trade at a 13 per cent discount, despite having nothing invested in unlisted shares and making a 40 per cent return last year. Manager Ben Rogoff has been at the helm for more than 20 years and has positioned the fund to benefit from the artificial intelligence revolution, which should keep growing in importance as the technology develops.  

Finally, for emerging markets, Pacific Assets (PAC) is a standout performer, with nearly half its portfolio invested in India. The managers see India as a more attractive Asian market than China due to the young population, stable political system and entrepreneurial companies. It has just 7.5 per cent invested in China, making its portfolio very different from emerging market or Asia tracker funds.

Matthew Bird, chartered financial planner at Falco Financial Planning, says:

You are wise to highlight the high fees incurred by Jane’s pension. At 0.4 per cent a year, the True Potential Platform (through which I assume these funds have been accessed) has relatively high annual charges. You may be able to lower these to 0.15 per cent by switching providers.

Next, your wife’s funds all appear to be actively managed, I calculate that the aggregate fund charges incurred for this plan are 0.8 per cent a year. If you were prepared to apportion some or all of these investments to passive index tracker funds, these charges could be lowered substantially, potentially to as little as around 0.1 per cent. All other things being equal, lowering fees should increase net returns over time.

Your goal is to “maximise growth” before the age of 60, but you also mention that you would like to keep 50 per cent of Jane’s pension safe. Maximising growth usually means investing the majority into the stock market, but this asset class is not ‘safe’ due to its potential to drop by 40 to 50 per cent when fear and economic turmoil take hold.

I recommend including bonds alongside stocks to take the edge off market volatility and then rebalance those assets annually. Use funds (preferably passive) as this will keep things simple and should ensure you are reasonably diversified.

You want to take a more risk-averse approach with your Isa but, cash aside, half the portfolio is invested in stocks via Maersk and four global funds. You may wish to consider including some bonds to de-risk this portfolio, especially as you build up to £100,000.

The trading you do, as you say, is “sporadic” and “reactive”. Sporadic (or specifically infrequent) trading is a good thing; regularly trading will incur fees and ruin the compounding effect of holding good businesses for the long term.

To reduce reactive trades, try to make investments that you have high long-term (10 years plus) conviction in and then monitor them, but try not to sell unless the company’s prospects have fundamentally changed, or the valuation has become excessive. If you are not comfortable with valuing companies, Phil Oakley’s book How to Pick Quality Shares is worth a read.

Two potential risks regarding your stocks are high valuations for the likes of Microsoft (US:MSFT), Tesla, Nvidia (US:NVDA), and Novo Nordisk (DN:NOVO.B), which are all trading on elavated price/earnings ratios.

This implies these companies will grow rapidly for some time to come. If growth disappoints for whatever reason the valuations could contract nastily. Second, you appear to have quite a high exposure to energy and commodity businesses. These could do very well if we experience rising prices, but earnings from such businesses can be unpredictable.

If picking actively managed funds, screening for the following may help: a high-risk adjusted performance over a long period (possibly demonstrated by a 10-year sortino ratio); competitive charging; high conviction (ie, not too many holdings), low turnover, a logical stock picking strategy (quality, value, momentum) and last but not least, an alignment of interests where the manager has significant wealth in the fund.