Preparing portfolio for retirement

Aged

I have one more year until I reach pension age, and wonder if I need to change my strategy at this stage in life. I have two pension funds which I probably won't need to dip into for at least 10 years - cash in ISAs and other deposit accounts will keep me going (along with my SP) until then. I don't want or need to be taking too much risk with my funds, but would hope for some healthy growth over the period. At the moment I'm thinking I'll stick with a good global equity index fund for perhaps 50%, but not sure what to do with the rest. At present, I'm invested in a couple of wealth preservation type funds and I presume it's wise to stick with them - I don't think I'd be comfortable with 50% in those though, as I remain to be convinced of how beneficial they are or will be in the future. Would love to hear from others about how they changed their investment approach as they crossed the finishing line into retirement!

Sarahspangles

If you have a period where earnings/pension don’t use all of your personal allowance, you may be able to draw on your pension(s) to maximise the amount that you extract tax free. With a standard tax code of 1257L you can take £16,760 - which is £12,570 that is taxable but within your allowance (making 75% of the £16,760) plus 25% from your tax free.

It can still grow in a S&S ISA if you like. 

Aged

Sarahspangles said:

If you have a period where earnings/pension don’t use all of your personal allowance, you may be able to draw on your pension(s) to maximise the amount that you extract tax free. With a standard tax code of 1257L you can take £16,760 - which is £12,570 that is taxable but within your allowance (making 75% of the £16,760) plus 25% from your tax free.

It can still grow in a S&S ISA if you like. 

Sorry, I should have said - the pensions were inherited and hence, tax free.

Marcon

Aged said:

I have one more year until I reach pension age, and wonder if I need to change my strategy at this stage in life. I have two pension funds which I probably won't need to dip into for at least 10 years - cash in ISAs and other deposit accounts will keep me going (along with my SP) until then. I don't want or need to be taking too much risk with my funds, but would hope for some healthy growth over the period. At the moment I'm thinking I'll stick with a good global equity index fund for perhaps 50%, but not sure what to do with the rest. At present, I'm invested in a couple of wealth preservation type funds and I presume it's wise to stick with them - I don't think I'd be comfortable with 50% in those though, as I remain to be convinced of how beneficial they are or will be in the future. Would love to hear from others about how they changed their investment approach as they crossed the finishing line into retirement!

You've got some contradictory statements in your post! Until you sort out in your own mind what you want to achieve, and how much risk you're prepared to take, you'll find it hard to come to a conclusion.

What others have done is often irrelevant, unless they have identical objectives and attitude to risk - which sounds unhelpful but is fundamentally true. That's doubly true here, given that these are inherited pensions and you don't have the same tax considerations when drawing from them.

tacpot12

When I retired, the principle change I had to make was to switch from accumulations funds to funds paying an income, as I wanted to drawn down the natural yield rather that sell assets. However, by asset allocation didn't change at all. I still have a diversified portfolio with about 25% in bonds and 60% in equities and 5% in commercial property; two thirds of the equities are UK-based. The 'funds' are a mixture of Investment Trusts (IT) and EFTs, with a heavy bias to towards ITs. 

I retired at 53, and used savings to get me to 55, when I could start drawing down. I made the above change at 54 to allow 12 months of income to accumulate in my SIPP (a) to provide the theory, and (b) to have a cash buffer in case the income dropped at all. I left about 10% of my SIPP invested in accumulation funds, as I didn't need to convert all the assets to produce the income I needed and I wanted to try to increase the potential for the portfolio to gain in capital value over the rest of my life. From my perspective, even at age 55, I was investing for a 40+ year period (my parents are in their late eighties).  

I've been pleased with the approach; even over the pandemic, the income never really fell and I have now reinvested about a third of the cash buffer to increase my income to address the unexpected inflation, rather than selling any of my accumulation funds. 

Aged

tacpot12 said:

When I retired, the principle change I had to make was to switch from accumulations funds to funds paying an income, as I wanted to drawn down the natural yield rather that sell assets. However, by asset allocation didn't change at all. I still have a diversified portfolio with about 25% in bonds and 60% in equities and 5% in commercial property; two thirds of the equities are UK-based. The 'funds' are a mixture of Investment Trusts (IT) and EFTs, with a heavy bias to towards ITs. 

I retired at 53, and used savings to get me to 55, when I could start drawing down. I made the above change at 54 to allow 12 months of income to accumulate in my SIPP (a) to provide the theory, and (b) to have a cash buffer in case the income dropped at all. I left about 10% of my SIPP invested in accumulation funds, as I didn't need to convert all the assets to produce the income I needed and I wanted to try to increase the potential for the portfolio to gain in capital value over the rest of my life. From my perspective, even at age 55, I was investing for a 40+ year period (my parents are in their late eighties).  

I've been pleased with the approach; even over the pandemic, the income never really fell and I have now reinvested about a third of the cash buffer to increase my income to address the unexpected inflation, rather than selling any of my accumulation funds. 

Hi tacpot12 thanks, that's really interesting. It's good to know that you're happy with the way things have worked out for you! I did wonder about changing from acc to inc funds, and also about using one fund as an 'income' fund and the other as a 'growth' fund, but I figure that since I won't need to draw down for at least 10 years it's fine to leave it all as 'accumulation' and aim for some growth. 

BoxerfanUK

I tend to agree with Marcon.  You say you don't want to be taking too much risk but want healthy growth!  I would have thought that not having to touch it for 10 years could afford you taking an element of risk in order to attain that healthy growth.

Aged

BoxerfanUK said:

I tend to agree with Marcon.  You say you don't want to be taking too much risk but want healthy growth!  I would have thought that not having to touch it for 10 years could afford you taking an element of risk in order to attain that healthy growth.

Well that's exactly why I'm thinking of 50% in global equities and the other 50% in something less risky!

Linton

My strategy is to put aside 40-50% of liquid assets as a 100% equity portfolio primarily intended to cover long term inflation for the rest of the portfolio. It is based on an investment timeframe of >10 years and so short/medium term crashes can be largely ignored.

The next tranch is a well diversified income portfolio targetted at a 6% return on initial cost.  The funds are globally diversified and produce dividends from equity income funds and fixed income from higher risk bonds, reits, infrastructure etc.  Since in the short/medium term dividends and fixed interest are much more stable in £ terms than capital value, equity crashes can again be largely ignored.

Finally there is a 20% of liquid assets tranch intended as a buffer and to provide easily available cash for major one-off expenses.  It is based on zero low risk PBs and low risk Wealth Preservation funds where of course again equity volatility is not a concern..  WP funds were essential whilst interest rates were low.  Since they have risen significantly I am considering moving to individual short/medium term gilts (bond funds are not a satisfactory alternative), but have not yet decided how best to do that.

Aged

Linton said:

My strategy is to put aside 40-50% of liquid assets as a 100% equity portfolio primarily intended to cover long term inflation for the rest of the portfolio. It is based on an investment timeframe of >10 years and so short/medium term crashes can be largely ignored.

The next tranch is a well diversified income portfolio targetted at a 6% return on initial cost.  The funds are globally diversified and produce dividends from equity income funds and fixed income from higher risk bonds, reits, infrastructure etc.  Since in the short/medium term dividends and fixed interest are much more stable in £ terms than capital value, equity crashes can again be largely ignored.

Finally there is a 20% of liquid assets tranch intended as a buffer and to provide easily available cash for major one-off expenses.  It is based on zero low risk PBs and low risk Wealth Preservation funds where of course again equity volatility is not a concern..  WP funds were essential whilst interest rates were low.  Since they have risen significantly I am considering moving to individual short/medium term gilts (bond funds are not a satisfactory alternative), but have not yet decided how best to do that.

Thanks for the detailed reply Linton! Your approach makes lots of sense and you obviously know what you are doing. I'm not quite so experienced or confident, so keeping things as simple as possible seems like the best way forward for me to stop me from stressing over my finances. I am a very cautious investor by nature, but I realise that some risk is required in order to achieve growth and I'm OK with that. 

I have been considering gilts but my current platform does not accommodate them. I am however thinking of changing platforms so gilts could become an option for me in the near future. I will hang on to my holdings in WP funds for a while yet in the hope that they will prove their worth. 

When you speak of 'higher risk bonds' in your middle tranche, do you mean individual bonds, or corporate bond funds?

nicknameless

Very interesting.

Possibly a couple of years away and personally have been thinking we might have our 70% equity portfolio balance too conservative for a retirement of hopefully 30 plus years.  But needing to draw more heavily initially on that due to when other income sources kick in is causing me pause for thought in rebalancing.

What is risky - volatility with better return, or less volatility with lower return?

Don't we all need to define what we mean by risk?

The theory / empirical evidence as I understand it says that I would be better off with a higher equity proportion.

OP I think you are talking about comfort with volatility not risk of running out of money.