How do I maximise my pension pot?

"I would like to build up as much as possible in my pensions so that in retirement they pay out an average income of 6 per cent or more a year," says Jeremy. "I invest as much as is necessary in my workplace pension to get the maximum contribution from my employer. And I make monthly contributions to a self-invested personal pension (Sipp).

"I also make monthly contributions into an individual savings account (Isa), and have used up most or all of the annual allowance in recent years. I would like my Isa and other non-pension investments to supplement my pension income in retirement with £15,000 or more a year.

"I am enrolled in an employee stock purchase plan and have options worth about £100,000. I receive options every year worth about £25,000 after tax, although how much I get is reviewed every year. These entitle me to buy shares in my employer twice a year at 85 per cent of their market value on the first or last day of each six-month period – whichever is lowest. These are vested quarterly while I am an employee of my company. I plan to sell shares in my employer worth about £25,000 each year, and reinvest the proceeds in my Sipp or Isa.

"My Sipp and Isa are mainly invested in investments trusts, and I mostly contribute to them via monthly payments. I typically hold an investment for over five years.

"I have been investing for over 30 years and would say that I have a high-risk appetite – I could tolerate an investment declining in value by 25 per cent in any given year.

"As I work in technology I always include investments with exposure to this sector in my portfolio. I also look to invest in smaller companies in Europe, Japan, the UK and US, although I recently sold Schroder US Smaller Companies Fund (GB00B7LDL923) and Pantheon International (PIN).

"I have recently added Edinburgh Worldwide Investment Trust (EWI), and am thinking of investing in Baring Emerging Europe (BEE) and Jupiter European Opportunities Trust (JEO).

"My partner has his own investments."

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You are making good use of your Isa and Sipp allowances. And you've diversified your portfolio nicely across equity investments without making the mistake that many fund investors make, of holding too many funds and paying more sets of fees than they need to. And investing regular monthly amounts is a good way to manage risk via time diversification, because you buy more shares when prices are low and expected returns are high.

But there is very little other risk mitigation – you have no cash or bonds so are very exposed to market risk.

Michael Martin, private client manager at Seven Investment Management, says:

When looking at retirement plans, the first step is usually to work out how much you hope to retire on, so you can target a certain income and growth rate between now and then to achieve this.

You want your non-pension investments to generate an income in excess of £15,000 a year. This should already be achievable with the investments you have accumulated, so what you are actually investing for?

You have an investment time horizon of at least five years but don’t say when you are going to retire. So let’s assume you take your pension in six years’ time. If you add the £100,000 from stock options into your Sipp [which is currently about £550,000 in size] and this pot grows a reasonable amount you risk breaching the lifetime allowance in six years. And this is excluding the monthly pension contributions you are making into your employer pension, so I would keep this in mind.

I always advise people to divest their company share schemes as soon as they mature. This is because you can take the profit, if they have done well, and you are diversifying your risk exposure away from the company that pays your salary.

To avoid an unnecessary inheritance tax bill, I suggest entering into a marriage or civil partnership with your partner so he can inherit your estate tax free if you die before him.

You might be able to tolerate a drop of 25 per cent in the value of your investments today, but could you in the months leading up to your retirement? Consider why you are taking a high level of risk when it seems that you don’t need to.

Nicholas Rolf, director – private clients, at Investment Quorum, says:

Without knowing your total income including rental, it is hard to make comments on your pension contributions. You should be aware that the pensions annual allowance is tapered for additional rate tax payers – as well as the ability to make contributions based on any unused annual allowances from the previous three tax years. It may be appropriate in the years that your stock options vest to make additional pension contributions to minimise your income tax liability, if you have the available allowance. 

Having an understanding of your desired expenditure in retirement and intended retirement age would help you to plan the level of investment growth and savings you need to achieve your retirement goals.

If you have spare savings after you have used up your annual pensions and Isa allowances, consider repaying part of your mortgage as the interest relief on buy-to-let mortgages has been heavily restricted.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You are exposed to the risk that investors might have wised up to past underpricings.  

A good part of your portfolio is invested in companies that have what highly regarded US investor Warren Buffett calls economic moats – attributes such as brand power which help them fend off competition. Lindsell Train Global Equity's (IE00BJSPMJ28) and Finsbury Growth & Income Trust's (FGT) 10 largest holdings include Diageo (DGE) and Unilever (ULVR). Scottish Mortgage Investment Trust's (SMT) 10 largest holdings include big tech stocks such as Amazon (US:AMZN), Alibaba (US:BABA) and Netflix (US:NFLX). And Fundsmith Equity's (GB00B41YBW71) include Microsoft (US:MSFT).

Historically, investors have underpriced stocks with monopoly power so they and the funds that got into them early have done very well. But we need to consider whether any asset that’s done well is still underpriced and if, perhaps, it is now overpriced. For example, in the early 1980s investors spotted that smaller companies had been underpriced for years and done well. So they piled into recently launched smaller companies funds and by the late 1980s smaller companies had become so overpriced that they underperformed for the following decade. Past performance is no guide to future performance isn’t a cliché – it's a real warning.

This doesn’t mean there’s a rush to sell. But consider as to whether these segments are still underpriced.

You are also exposed to smaller companies and, via Rights & Issues Investment Trust (RIII) and TM Cavendish AIM Fund (GB00B0JX3Z52), Aim stocks. These tend to be driven by sentiment even more than other shares: when investors turn bullish Aim stocks do unusually well and when sentiment turns negative they do particularly badly.

To some extent, these two risks offset each other. When investors become pessimistic they are likely to rotate out of smaller Aim stocks and into bigger defensives. So in this sense you have diversified your investments nicely, but not perfectly.

Aim stocks have in the past been systematically overpriced because investors pay too much for the small chance of massive growth. In owning them, you are betting that they have wised up to that error. But I’m not confident that this is the case. And if sentiment turns bad it’s likely that equities in general will do badly. Big defensives would only outperform in that they would lose money more slowly.

This doesn't look like an immediate danger, as an above-average dividend yield and large volumes of foreign sales of US stocks in recent months point to a benign outlook for equities. But this will change, so you need some protection against it.

One way to mitigate this risk is to sell when a fund’s price drops below its 200-day or 10-month moving average. Doing this would protect you from the small but nasty chance of protracted bear markets.

Michael Martin says:

You are taking a large amount of equity risk. You hold some of the same investments in both your Sipp and Isa, so there is little diversification and your investment portfolio is quite concentrated.

Some of the funds you hold have done well over the past five years, but how are they set up for the next five? Due to their success and the size they have now grown to, Scottish Mortgage Investment Trust and Fundsmith Equity, for example, may struggle to replicate this performance and have exposure to successful investment themes over the next five years. Fundsmith Equity, Lindsell Train Global Equity and Scottish Mortgage Investment Trust also have some of the same holdings as each other.

It could be worth adjusting your portfolio to meet your growth requirements. You are looking for a return of 6 per cent-plus a year, on average. However, you have investments that could grow 20 per cent in a year but also drop 35 per cent, so this seems at odds with your goal. Take the risk you need to take – not the risk you want to take.

Nicholas Rolf says:

You are an experienced investor, and your Sipp and Isa portfolios are in line with the sort of allocation a high-risk investor could take. You have some very good holdings and should have been well rewarded for embracing global equities.

We would suggest maintaining and perhaps even increasing your allocation to the US. We like Baillie Gifford American (GB0006061963) which focuses on stocks with exceptional growth opportunities. Or consider iShares Core S&P 500 UCITS ETF (CSP1) which provides cheap exposure to a market that is exceptionally difficult to outperform.

You have quite a high allocation to European equities. Consider reducing your European value exposure in favour of European quality growth stocks such as those held by LF Miton European Opportunities (GB00BZ2K2M84). We prefer this fund to Jupiter European Opportunities Trust at the moment, because that trust's longstanding manager, Alexander Darwall, is leaving Jupiter to set up his own asset management company [and it is not yet clear if Jupiter European Opportunities Trust's board will reappoint him as manager when he is at his new firm].

It may also not be the best time to add smaller emerging European economies while some of the larger European economies continue to struggle. 

For the longer term we like Asia and emerging markets, but are wary of the continuing strength of the US dollar, which is mainly a headwind for these economies.