‘HOW DO I TURN MY £300,000 ISA INTO £50K-A-YEAR RETIREMENT INCOME?’
Making the right investment decisions is key to retiring early. Tim Knight, a 55-year-old pilot from Wiltshire, hopes that his Isa will be enough to bridge the gap in his finances in order to leave work in just two years.
“I’ve been investing for decades, starting with a ‘Pep’ in the 1990s. Since then my strategy has just been to buy and forget,” he says.
“I just kept contributing until the financial crisis in 2008, when I had no spare cash. I stopped for a while and then the pandemic happened. I bought a few stocks during the crash – some of them worked, some of them didn’t. I lost a lot on Cineworld.”
Mr Knight and his wife’s portfolios are together now worth around £312,000 after years of steady contributions and a long bull run in the stock market.
“We have a lot in a few single shares, such as Unilever, because of an inheritance,” he said. “But I want to simplify the portfolio so that it is more focused on supporting us in retirement.”
Ideally, Mr Knight and his wife are looking for a retirement income of around £50,000 each year. Having worked for the Royal Air Force for 16 years, Mr Knight is already paid an index-linked pension of £18,000.
“I left the RAF in 2007, and in my next job I chose cash payments in lieu of a pension, so I could pay off my mortgage.”
Mr Knight owns his home in Wiltshire, which is estimated to be worth around £1.2m. He joined his current employer around a year ago, where he earns £80,000 and contributes around £600 per month into a defined contribution pension with Nest.
“This pension is negligible though, really. I would like my Isa to help me reach my goal of £50,000 in retirement, with as much of that as tax free as possible. My wife and I are going to contribute the maximum to our Isa in the run-up to the summer of 2026, when I’m hoping to leave work.”
Paul Derrien, director at Canaccord Genuity Wealth Management
A target income of £50,000 a year is going to be tight, but potentially achievable. If the Isa assets produce 5pc income (which is currently at the top end of what is realistic) and let’s assume the portfolios have reached £400,000, then there would be £20,000 of net annual income from the Isas and a similar indexed number from the RAF pension.
Any shortfall could be made up from the defined contribution scheme that Mr Knight is currently contributing towards. Their state pensions should also help bridge the gap.
There might be a better alternative than adding to the Isas, which is Mr Knight’s pension. Given his salary, he is able to move up to £60,000 gross into a pension each year, which could be funded by their existing investments and savings.
There are two major benefits. Firstly, it is a way of reclaiming tax paid on earnings (some of which is at 40pc) and secondly, if he moves some of his assets into a self-invested personal pension, or Sipp, the money will be exempt from inheritance tax.
It is also worth noting that because Mr Knight’s salary exceeds £60,000 and there have been no pension contributions in previous years he could use some of the previous years’ allowances that are carried forward.
Now turning to the Isa portfolio, it seems that most of the investments are in shares, infrastructure and commodities. While Mr Knight is working and not needing other income, this is fine. But as retirement is fast approaching, his risk outlook will likely change and some portfolio reconstruction should happen sooner rather than later.
If Mr and Mrs Knight want to get 5pc from the Isas, they need to look at the investments that fail to meet this criteria. Generally, investing in direct stocks is riskier than funds. So it makes sense to move these investments into funds and low cost investment trackers.
At the moment, it is possible to achieve around 5pc from fixed income and more from infrastructure (such as The Renewables Infrastructure Group, which is already held). I would keep 60pc of the portfolio in shares and invest 40pc into fixed income and infrastructure investments that provide the level of income needed.
In our portfolios, some fixed income funds that we look at are the iShares UK Ultrashort Corporate Bond fund, iShares US Treasury 7-10 year Hedged ETF, GAM Star Credit Opportunities and TwentyFour Strategic Income.
When constructing income focused portfolios we look at a number of funds which include: Artemis Income, Schroder Global Equity Income, Aberdeen Asian Income, City of London and Law Debenture (which are already held by Mr Knight), iShare UK Dividend and Ecofin Utilities and Infrastructure.
Zoe Gilliespie, director at RBC Brewin Dolphin
As Mr Knight approaches retirement, he may wish to review his overall attitude to risk and investment strategy for the portfolios. When he starts to draw on the assets, he may not have the same capacity for loss as he did when he was not reliant on the investments.
Adding some fixed income assets such as bonds or government gilts to the portfolio could provide a high income yield, while potentially reducing volatility. The current portfolio has around 10pc in funds that are in areas outside of stocks, such as infrastructure, property, and commodities.
Overall, Mr Knight’s holdings are imbalanced – having a more even distribution of assets will reduce the skew in performance from larger holdings.
For example, the largest individual holding is Unilever, which accounts for over 15pc of the portfolio, so the underlying performance would be influenced by its share price. Despite having a dividend yield of over 3.5pc, the share price has produced very little in the way of a capital return over the last five years.
I would also be worried about the high exposure to the Schroder UK Alpha Plus fund, whose performance over the last five years has been mixed.
The current portfolio has a large bias towards British stocks and has less in overseas markets. Around half the world’s global equities are listed in the United States which has a high weighting to the strongly performing growth-focused technology companies.
Global funds generally have a US tilt, however the Axa Framlington Health fund invests in a narrow sector of the market, and therefore a more general global fund could give a better spread of assets. Something like the Fundsmith Global Equity fund would give a wider exposure to global stocks, including US companies.
Alternatively, Mr Knight could invest directly in US funds, either through a passive strategy or using an actively managed fund. A simple S&P 500 tracker would give a passive approach to the US whilst the GQG Partners US fund could be an active option.
The portfolio also has a large weighting to Asian and emerging markets funds which historically have been more volatile. I would consider selling out of some of these holdings.
Mr Knight also mentioned that he is investing some spare cash into the City of London Investment Trust which he deems as being “safe”. However, the trust invests heavily in stocks and therefore can be affected by market volatility.
If he is looking for something more secure, I would suggest moving this money into another asset class, such as bonds.
2024-03-16T17:01:33Z dg43tfdfdgfd