Stewart is 50, divorced and has two children aged 19 and 17. He and his current partner own their home, which is worth about £250,000 and mortgage-free. They both work for a whisky company and will receive defined-benefit (DB) pensions from their employer's scheme when they retire.
"I am planning to retire at 55," says Stewart. "I may do a bit of consultancy work or seek non-executive roles, but my main aim is to travel, relax and enjoy life.
"My workplace DB pension is estimated to pay £40,000 a year from when I am 55 and my partner's is estimated to pay £25,000 a year. She is the same age as me and also intends to retire at 55. Our workplace DB pensions are index-linked and will be our main source of secure income.
"Our DB scheme closed in 2014, since when I have invested £150,000 into our employer's defined-contribution (DC) scheme and my partner has put in £75,000.
"I also have a self-invested personal pension (Sipp) worth about £52,000, and a pension from a former employer worth around £25,000, which I am in the process of transferring into the Sipp. I also plan to transfer my current workplace DC scheme into the Sipp before I retire.
"But I am concerned that I will breach the pensions lifetime allowance [which is currently £1,030,000]. I currently contribute £10,000 a year to my DC scheme - my maximum allowance as an additional-rate taxpayer. But I intend to stop contributions altogether this year and take the full cash allowance offered by my employer in place of a pension.
"Using the partial cash allowance I currently get from my employer, I invest £500 a month into both Downing Four VCT (D4G) and Downing Four VCT Healthcare (D4H). I will increase these contributions when I get the full cash allowance offered by my employer in place of a pension.
"I and my partner will use our full individual savings account (Isa) allowances for the next five years, with the aim of investing £100,000 each. I will contribute to VCTs instead of a pension – I am aiming to put a further £100,000 into them over the next five years.
"I also have two Enterprise Investment Schemes (EIS), which I invested in four years ago to mitigate a tax bill. About £36,000 will be realised from these over the next 12 months, and I intend to reinvest this in VCTs.
"I have shares in my employer worth about £300,000 and my partner has shares in it worth £200,000. We can retain these shareholdings when we retire. These shares only yield 2 per cent but their capital growth has been strong, so we intend to sell some of our holdings each year, offsetting the gains against our capital gains tax (CGT) allowances, to top up the income we get from our pensions.
"I would like our investments to generate an income of 4 per cent to 5 per cent a year, with some capital growth. The money will be used to fund travel, do the nicer things in life and help my children get onto the property ladder. I also invest £400 a month in my daughter's Isa, and the same amount into my son's junior Isa.
"I am concerned about our portfolios' diversity and asset allocation, and their ability to grow and generate income. And in the longer term I need to try to limit the amount of inheritance tax (IHT) my heirs will pay.
"I am prepared to lose up to 20 per cent in a given year, because we have our DB pensions and shares in our employer to fall back on, but I think that our risk tolerance will reduce as we move closer to retirement.
"Over the past two years I have taken some substantial gains made on direct equity holdings and mainly reinvested them in investment trusts and real-estate investment trusts (Reits), many of which have more of an income focus. But some of these invest in higher-risk assets. I avoid open-ended funds because it costs more to hold these on the investment platform I use.
"I started investing 30 years ago, initially via monthly savings into investment trusts, then via an execution-only broker and now via an online broker. When choosing direct shareholdings I look for solid fundamentals or disruptive business models that I understand. I have made substantial gains on these over the years, although have tended to sell half when they have doubled. But I have held others for a very long time as I see them as core holdings.
"Like everyone I have had some that did not work out, such as care home operator Southern Cross which went bust. And at the time of the financial crisis Royal Bank of Scotland (RBS) was a substantial holding because I thought it was safe and would provide a good reliable income.
"I recently sold my holding in Dignity (DTY) and re-invested the proceeds in Warehouse REIT (WHR). I participated in Aberdeen Standard European Logistics Income's (ASLI) initial public offering. And I have invested £30,000 of my cash savings in F&C Commercial Property Trust (FCPT), SQN Asset Finance Income Fund (SQN) and TwentyFour Select Monthly Income Fund (SMIF).
"I want to have around 20 investments in my Isa and a similar number in my Sipp when I have transferred in my former employer pension and current DC pension. So I am considering topping up some of my existing holdings, and investing in JPMorgan Indian Investment Trust (JII), Bluefield Solar Income Fund (BSIF) or Foresight Solar Fund (FSFL), and Greencoat Renewables (GRP)."
Stewart and his partner's portfolio
|Holding||Value (£)||% of portfolio|
|Aberdeen Emerging Markets Investment Company (AEMC)||10121.76||0.83|
|Aberdeen Standard European Logistics Income (ASLI)||10500.00||0.86|
|CQS New City High Yield Fund (NCYF)||10685.52||0.88|
|Ediston Property Investment Company (EPIC)||9946.25||0.82|
|Empiric Student Property (ESP)||12185.22||1|
|European Assets Trust (EAT)||11309.00||0.93|
|Henderson Far East Income (HFEL)||10774.68||0.89|
|Impact Healthcare REIT (IHR)||4573.80||0.38|
|International Biotechnology Trust (IBT)||11058.14||0.91|
|Invesco Perpetual Enhanced Income (IPE)||9987.29||0.82|
|iShares Core £ Corporate Bond UCITS ETF (SLXX))||9050.14||0.75|
|Merchants Trust (MRCH)||11973.44||0.99|
|SQN Asset Finance Income Fund (SQN)||29457.90||2.43|
|TwentyFour Select Monthly Income Fund (SMIF)||20935.28||1.72|
|Utilico Emerging Markets Trust (UEM)||9093.47||0.75|
|Warehouse REIT (WHR)||10301.03||0.85|
|Worldwide Healthcare Trust (WWH)||12454.00||1.03|
|F&C Commercial Property Trust (FCPT)||9589.58||0.79|
|Henderson Smaller Companies Investment Trust (HSL)||11765.04||0.97|
|Scottish Mortgage Investment Trust (SMT)||12392.56||1.02|
|TwentyFour Income Fund (TFIF)||10003.35||0.82|
|Zambeef Products (ZAM)||9150.00||0.75|
|Real Estate Credit Investments (RECI)||4015.44||0.33|
|RM Secured Direct Lending (RMDL)||3723.00||0.31|
|Shires Income (SHRS)||5181.77||0.43|
|Target Healthcare REIT (THRL)||3787.88||0.31|
|Downing Four VCT (D4G)||2218.50||0.18|
|Downing Four VCT Healthcare (D4H)||2227.50||0.18|
|Hargreave Hale AIM VCT 1 (HHV)||20814.68||1.72|
|Octopus Titan VCT (OTV2)||9341.41||0.77|
|Proven Growth & Income VCT (PGOO)||7901.25||0.65|
|DC pension schemes||225,000||18.53|
|Former employer pension||25,000||2.06|
Stewart's daughter's Isa
|Holding||Value (£)||% of portfolio|
|Aberdeen Diversified Income And Growth Trust (ADIG)||3679.90||13.71|
|AEW UK REIT (AEWU)||4832.00||18.01|
|City Merchants High Yield Trust (CMHY)||333.68||1.24|
|Merchants Trust (MRCH)||6968.80||25.97|
|NB Global Floating Rate Income Fund (NBLS)||3761.88||14.02|
|Sequoia Economic Infrastructure Income Fund (SEQI)||4067.88||15.16|
|Target Healthcare REIT (THRL)||3187.13||11.88|
Stewart's son's Junior Isa
|Holding||Value (£)||% of portfolio|
|Acorn Income Fund (AIF)||4114.78||18.14|
|International Biotechnology Trust (IBT)||3260.34||14.37|
|Invesco Perpetual Enhanced Income (IPE)||2496.42||11|
|JPMorgan Global Emerging Markets Income Trust (JEMI)||3760.50||16.58|
|Pacific Horizon Investment Trust (PHI)||4042.48||17.82|
|UK Commercial Property Trust (UKCM)||1741.22||7.68|
|Zambeef Products (ZAM)||2579.20||11.37|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS READER'S CIRCUMSTANCES.
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
Your portfolios have relatively few ordinary equities. About a fifth of your Isa is invested in corporate bonds, and you have almost as much in Reits and property stocks, a similar allocation to your other portfolios.
A benefit of this is their income. And such assets are less exposed to swings in share prices, although not entirely immune to them as pretty much all investment trusts are to some extent correlated with the general market.
However, income usually comes at a price. Such investments offer less long-term upside growth potential than ordinary equities. This is perhaps especially true of corporate bonds as credit spreads are quite low so might not fall much lower.
These assets also carry a small risk of big trouble. With bonds, this is defaults. Portfolios of corporate bonds should diversify away much of the risk of individual defaults. But they do not remove the risk that investors will dump corporate bonds in fear of more defaults in the event of a recession.
The risk with Reits is that property becomes hard to sell in a recession, so you cannot sell at reasonable prices.
Liquidity risk might also be a problem for your VCTs, on which I have mixed views. I like them because I suspect a lot of future growth will come from unlisted companies, but it's a bad idea to buy assets just because of their tax breaks.
However, you should be able to tolerate this liquidity risk as you have substantial cash holdings and you are saving substantial amounts.
And there isn't a good reason to believe that a large increase in default risk is imminent. Such an increase is most likely to happen in a recession, but the best indicator we have of recession – the shape of the yield curve – doesn't suggest there will be one soon. The yield curve is pretty much the only useful indicator we have of this.
So your bias to these sectors is reasonable. Just make sure that you are aware of their risks.
Tim Stubbs, independent investment consultant at TS Investments, says:
You and your partner's combined shareholdings in your employer represent over 40 per cent of your combined wealth, excluding your home. With only five years to go until your planned retirement, if anything threatens the financial viability of your employer such as bankruptcy, your employment and the sizeable stock holdings, and maybe DB pensions, could all go down together. So discuss removing or diluting the worst-case risks associated with your massive shareholdings in your employer, after getting professional financial advice on the CGT implications of doing this.
You are not afraid of investing in esoteric investment vehicles, which is good. But the debt, lending, and asset sale and leaseback funds, for example Real Estate Credit Investments (RECI) and RM Secured Direct Lending (RMDL), may be hard to evaluate. Make sure that you understand their various risks, in particular that of a downturn in the credit cycle, and the ability of the underlying businesses to continue servicing debts in an economic recession. Such outcomes could see this type of investment hard hit by sentiment.
Rising interest rates may also pose a threat, especially to your high-yielding bond funds skewed towards lower-quality credits. Such assets account for around 20 per cent of your investment portfolio (excluding your employer shareholdings, DC pensions, cash and VCTs), and are a potential area of risk in a downturn or rising interest rate environment. High yields of between 5 per cent and 8 per cent in today's environment do not come without risk.
Petronella West, director of private clients at Investment Quorum, says:
You should review your level of pension funding immediately and consider ceasing to accrue pension benefits as you are likely to be affected by the lifetime allowance charge at some point. And as you are going to be dependent on your DB pensions for part of your retirement income, I would recommend that you review your scheme's report and accounts to see if it is in any trouble or has a deficit. And if this is the case, does it have a recovery plan and what is its funding position?
Continuing to realise shares in your employer and making use of your CGT allowances makes sense, and deals with the potential liquidity risk of private company shares. Reducing those in proportion will also give you greater diversification.
Draw income from your Isas and unwrapped investments before exhausting your personal pension funds as these can be passed down to future generations free of IHT.
Funding Isas for your children is sensible, as the £800 per month you are giving them will either fall within the Gifts out of Normal Expenditure Exemption and/or the £3,000 annual exemption for IHT purposes. If you have not used the annual exemption previously, you can implement two years' allowance - £6,000 in the first year. But keep a good record of the gifts you make to your children.
If you help your children with property purchases at different times, draft a 'letter of wishes' that instructs the children to share equally all gifting and IHT allowances in the event of your premature death.
Alternative Investment Market (Aim) VCTs can also help with IHT planning. And VCTs offer attractive tax reliefs and tax-free dividends, which will be valuable to you both now as an additional-rate taxpayer and in retirement, if you are a higher-rate taxpayer. But be aware of the higher-risk nature of these investments and their potential liquidity risks. Charges on these investments can also be very high.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow says:
The obvious gap in your portfolios is a relative lack of US equities. Usually, I'd recommend a tracker fund as a cheap and easy way of getting exposure to this market. And I'd recommend a global tracker as a way of achieving a balanced equity portfolio, especially with regard to your children's Isas as usually a global tracker offers the best hope of long-term growth.
There are, however, dangers in making such a shift. High US valuations, evidence that sentiment towards global equities is on the high side, and the possibility that rising US interest rates might cause a reversal of the reach for yield that has bid up shares in recent years could all hurt the market. Perhaps, then, you are wise to be underweight the US.
So for the time being I suspect this portfolio is OK. There might well come a time, however, when a shift towards a more balanced equity position is warranted.
Tim Stubbs says:
Your preference for using a large number of investment trusts to form the backbone of your investment portfolio is better than the approach many self-directed investors take, of only investing directly in shares. Individual companies can and do go bust, whereas by holding more than 20 investment trusts across your family's various portfolios you indirectly have exposure to several hundred, if not thousands, of financial assets, achieving notable diversification.
However, if there is a sizeable market shock or correction investment trusts will almost certainly swing to notable discounts to net asset value (NAV), compounding any losses sustained at NAV level – a double whammy effect.
Your portfolio is fairly well split between UK, global and emerging markets equities, Reits, fixed interest and other alternatives. You also have exposure to long-term themes such as healthcare. This is in contrast to many private investor portfolios that are loaded with UK stocks.
That said, consider adding to your UK equity investments. Less than 10 per cent of your investment portfolio is in conventional UK equities, excluding your employer shareholdings, DC pensions, cash and VCTs. Sentiment towards domestic assets is weak in large part due to Brexit concerns, and their valuations are relatively appealing. UK equities currently offer a potentially attractive blend of income and capital growth prospects, which might suit your objectives. And there is no shortage of UK equity investment trusts to pick from.
Reits should offer an attractive blend of near-term yield and long-term capital growth, as long as that sector's fundamentals remain sound. And their profile matches your portfolio yield goals. However, allocating investments to arrive at a portfolio yield of 4 per cent to 5 per cent comes with risks, which can be easy to forget during years of plain sailing.
Your Reits, infrastructure, agriculture and resources investments may provide a long-term inflation hedge if necessary.
Petronella West says:
A yield of 4 per cent to 5 per cent a year is achievable, but generating it has become challenging in recent years as interest rates and bond yields are at historic lows, and dividend yields are only just starting to rise. So you would need to remain in equities, property and alternative strategies to achieve that level of yield.
But be wary of chasing yield and investing in securities that are paying dividends from capital to achieve this. As you have five years before you retire you can continue diversifying the portfolio through a growth and income strategy, and consider adding the following investments to help diversify it.
We are currently entering a technology revolution, with robotics, automation, cyber-crime, electric and driverless cars, and block chain technologies emerging. And mergers and acquisitions in this area are likely to follow. A good way to get exposure to this could be Polar Capital Technology Trust(PCT), which has an ongoing charge of 1.01 per cent.
Commodities should continue be in demand as the world's appetite for expansion continues, especially in emerging markets where billions is being spent on infrastructure and energy needs. A good way to get exposure to these is BlackRock World Mining Trust (BRWM), which [at time of writing] is trading on a 13 per cent discount to NAV and has a yield of 3.88 per cent. It has an ongoing charge of 1 per cent.
Scottish Oriental Smaller Companies Trust(SST) aims for long-term capital growth by mainly investing in smaller Asian companies with market capitalisations of less than $1.5bn. It invests in companies listed in countries including China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam, and is trading on a 12 per cent discount to NAV. It has an ongoing charge of 1.18 per cent.
There isn't a big difference between open-ended funds and closed-ended investments trusts, so don't disregard open-ended funds as some of these are run by excellent managers offering outstanding investment strategies and performances. Consider the following funds, which are top quartile performers and will further diversify your portfolios.
|Fund||12-month yield (%)*||Dividend policy||Strategy||Ongoing charge (%)*|
|MAN GLG UK Income (GB00B0117D35)||4.82||Monthly||Growth & Income||0.9|
|Artemis High Income (monthly income share class GB00BJT0KR04)||5.49||Monthly||Income||0.69|
|Baillie Gifford American (GB0006061963)||0||NA||Growth||0.52|
Source: Investment Quorum, *Morningstar as at 11 May 2018