- This reader has seven or eight years to get the maximum growth out of his Sipp
- Experts look at his current holdings, and how such goals match his stomach for risk
Sipp, Isa, cash and Premium Bonds, a business and a property
Generate Sipp growth over seven or eight years and build an Isa portfolio of high-yielding shares
Investing with a shorter time horizon is a challenge that focuses the mind – and one that can come with a great cost if things go wrong. Ryan, who is 65 and planning to retire in early 2025, is facing up to such a daunting task as he looks to ready a portfolio for his later years.
Once he retires in early 2025, Ryan will wind up his consulting business, a move that should release around £300,000 in cash. “My intention is to use approximately £200,000 of this over the following six or seven years to top up my £11,000 income from the state pension, due to commence in mid-2024, and £14,000 from an occupational pension, giving a total income of about £55,000," he says.
Ryan also has a self-invested personal pension (Sipp) worth £465,000. He plans to invest a further £85,000 in the Sipp over the 15 months before retirement, but wants to know how to get the most out of it over a multi-year period.
“My hope is to continue to grow my Sipp over the next seven or eight years before starting to draw on it from about the age of 73,” he says. “I am not yet sure whether this will be in the form of income drawdown, an annuity or a mix of both.
“In parallel with this, I am looking to build up my individual savings account (Isa) over the next few years to about £100,000 [from a current level of around £40,000], primarily in relatively high-yielding shares, so producing an additional tax-free income source when required.”
Ryan poses a number of questions here. He wants to know how his Sipp and Isa portfolios should look over the seven to eight-year period, considering his investment goals for each. He also wonders if it’s realistic to expect a £30,000 income from the Sipp, and more broadly asks how he should deploy further investments and rebalance the portfolio.
In terms of other assets, Ryan, who is unmarried and has financially independent children in their 30s, has a mortgage-free home worth roughly £500,000, and £70,000 in cash and Premium Bonds.
Much as he seeks portfolio growth in the coming years, Ryan acknowledges that his appetite for risk is "reducing". “The recent inflationary shocks have made me more aware of the risks of income shortfall in retirement, but if necessary I could continue to work an additional one or two years either part or full-time,” he says.
He adds: “My focus is on the value of the portfolio in seven years, and how to position it recognising inflation and the possibility that my pension may need to last a long time.”
Ryan also has a few specific strategies in mind for his investments. In the Sipp, he wants to move to fewer, larger holdings, with the hope of having no more than 20 positions. He also wants to spread risk by making more use of funds rather than individual shares, and like many investors has considered putting more fixed income into the portfolio.
In the Isa, until he needs the income Ryan would like to reinvest any dividends into Alliance Trust (ATST) in the hope of generating good long-term growth.
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 Magnus, part of Wren Sterling Group, says:
You are doing the right thing by being on the front foot and thinking ahead. While your goals are not unrealistic, it is imperative that you get the sequencing right and I would encourage you to speak to a financial planner, as these are key events.
With that said, the goals seem sensible and clearly thought out. The next steps would be making the best use of the right tax wrappers (and withdrawing from them in the most efficient sequence) and then ensuring that the investments within them stack up as the best players on the pitch. Accepting that the choice of tax wrappers is a detailed and personal one, I can make some observations about the components of your current portfolio.
While there is a good and varied mix of assets, the high equity content is out of kilter with someone who describes their risk tolerance as “reducing”. You will need to have a decent allocation to equities in order to outpace inflation, but could perhaps consider a lower weighting with greater diversification and less concentration in smaller companies and individual names. The smaller companies have the greatest potential for upside, but also carry a higher degree of risk, which you are looking to step away from.
I applaud your aim to hold more bonds and would encourage you not to be put off by their performance in the past couple of years. This asset class has been through a major re-set and (even with its strong recent run) now offers compelling value. We are big fans of the team at Artemis and own the Artemis Target Return Bond Fund (GB00BJXPPH66) across our portolios. We believe this fund provides excellent ballast to portfolios and also comes with an attractive yield.
Within our fixed interest allocation, we like stabilising short-dated funds such as the Artemis fund above, Axa Global Short Duration Bond Fund (GB00BDFZQV30) (run by Nic Trindade) and TwentyFour Asset Management’s Absolute Return Credit Fund (LU1273680238).
Yields on these funds have come down a fair bit in the past couple of months, but they still yield around 4.5 per cent, and this is higher than their longer-dated counterparts. This is an attractive dimension of fixed interest markets currently: yields for short-dated bonds are higher than for long-dated bonds. Moreover, they are higher than expected future inflation and provide opportunities for capital growth.
Within our clients’ portfolios at Magnus, we blend these shorter-dated stabilising fixed income assets with longer-dated investments such as BlackRock Corporate Bond (GB0005769541) run by Ben Edwards and the Invesco Tactical Bond Fund (GB00B4V74V60) run by Stuart Edwards and Julien Eberhardt. The Invesco fund is particularly interesting as they have a wide remit and can flex across the various parts of the fixed interest markets.
On the equity side, I’d highlight managers such as Gresham House in the UK who run the WS Gresham House Multi Cap Income Fund (GB00BYXVGS75). This invests in mid-sized companies, so should only warrant a small allocation (due to Ryan’s risk tolerance), but the team is outstanding and it will tick the income box too. Alongside this, the TM Redwheel UK Equity Income Fund (GB00BG341295) is a strong complementary holding in the UK, as is Artemis Income Fund (GB00B2PLJH12).
On the global side (and sticking with the income theme), I'd highlight Guinness Global Equity Income (IE00BVYPP131) as well as the FTF Clearbridge Global Infrastructure Income Fund (GB00BMF7D555).
Both of these are good income assets, with the latter also being a beneficiary of the longer-term trend of more money being spent on renewing creaking infrastructure. While not an income strategy per se, we at Magnus like the Royal London Global Equity Diversified Fund (GB00BF93WF36) run by Peter Rutter and the excellent team there. It provides excellent core global exposure and is a good complement to the other managers.
Peter Hargreaves, financial planner at EQ Investors, says:
As you approach retirement, crafting a thoughtful investment strategy is crucial for financial security. Your attitude towards risk, capacity for loss and time horizon should all be factored in when establishing a risk profile.
Your time horizon plays a pivotal role, especially if you're contemplating the purchase of an annuity in seven years or opting for flexi-access drawdown, where funds remain invested for a more extended period. Generally, a longer time horizon allows for a higher tolerance for risk, considering potential market recoveries.
The decision to purchase an annuity hinges on your essential expenditure, particularly if your state pension and occupational pension cover your basic needs. Assess whether more guaranteed income, in the form of an annuity, is vital for your financial plan.
Risk in your portfolio is established through asset allocation, determining the percentage of equity, fixed interest, cash, and property. See our asset allocation model below for more.
Your asset allocation is dependent on your risk profile and time horizon, so establishing these should be your first port of call.
Funds offer greater diversification and can be managed through passive or active strategies. Passive funds track market indices, providing low-cost access, while active funds rely on fund managers to outperform benchmarks.
For a simplified approach, consider a global index-tracking equity fund and a global index tracker bond fund. Allocate percentages based on your risk profile, creating a well-diversified, easy-to-manage portfolio.
One retirement spending guideline is the 4 per cent safe withdrawal rate. This approach involves withdrawing 4 per cent of your total investments in the first year, adjusting for inflation in later years.
Retirement planning is nuanced, and adjustments may be needed based on evolving circumstances and market conditions. Regularly review and adapt your strategy as necessary.
If you run a limited company, you can contribute pre-taxed company income to your pension. Because an employer contribution counts as an allowable company pension scheme business expense, your company receives tax relief against corporation tax. You have cash built up in the business and part of this could be paid into a pension using the pension annual allowance and potentially the pension ‘carry forward rules’. An accountant may be able to help you here. You should also look to make use of your Isa allowance.
