'Is our pot big enough to pay out £72,000 a year?'

George and his wife are both age 55 and directors of their company. They each earn £48,000 a year from a combination of salary and dividends. Their home is worth about £400,000 and they have a property abroad of about the same value. Both properties are mortgage free. George and his wife have four children.

"We would like to retire in five years and draw £6,000 a month from our investments without eroding their capital value," says George. We have sufficient capital in our company to pay salaries and dividends for the next five years, and cash savings worth £170,000. So our investment objective, until we retire, is to maximise returns, at which point we will switch to a portfolio that generates income.

"We have been investing for two years and hold our investments within pensions, individual savings accounts (Isas) and my general investment account. We will have sufficient capital to see out short-term market fluctuations and could wait a year before switching if necessary, so have an aggressive attitude to risk. And we are not fans of bonds and property.

"Examples of recent Isa additions include JPM US Select (GB00B2Q5DR06), Fidelity Global Special Situations (GB00B8HT7153), FTF Martin Currie UK Equity Income (GB00B7DRD638), JPM Asia Growth (GB00B235GR40) and BlackRock Continental European (GB00B4VY9893). We chose these funds because they were on our investment platform’s best buy list. But otherwise, we don’t have much of a strateg.

"Tax planning is also very important because we want to preserve the value of and pass on assets to our children."

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

Shelley McCarthy, managing director at Informed Choice, says:

A cash flow forecast and financial plan would help you to understand how sustainable your income requirements are and the level of risk that you need to take. At present, your investments are worth £928,687 and you require income of £72,000 a year. I’ve assumed that this is a gross figure, so this would equate to 7.7 per cent of your investments. Typically, an income between 3 per cent and 4 per cent is considered to be sustainable.

If you were to use a figure of 4 per cent, you would require a fund of £1.8mn to generate gross income of £72,000 a year. Over five years, you would need a growth rate of 15 per cent a year to generate this capital figure.

There are strategies that could reduce your current tax burden. You could hold the general investment account in joint names so that you are both able to use your various allowances and try to keep your income in the basic-rate tax band. You each have only £2,000 of your basic-rate tax band remaining, meaning that dividend income plus interest is likely to tip you into the higher-rate tax band.

You could pay larger pension contributions directly from the company into your pension plans rather than taking dividends. This would reduce your corporation and personal income tax bills. You could then use the cash or other investments that are less tax efficient to supplement your income. Your personal contributions to a pension are likely to be limited if you have small salaries, whereas your employer contributions could be worth up to £60,000 a year, subject to the ‘wholly and exclusively’ rules.

The additional benefit of putting more into your pensions is that assets within these are outside your estate for inheritance tax (IHT) purposes. Currently, you should be able to pass on £1mn IHT-free as it looks like you will qualify for the residence nil-rate band in addition to the standard nil-rate band. Your current taxable estate is worth around £1.5mn so there would be IHT at 40 per cent to pay on £500,000, which equates to £200,000.

Consider tax wrappers for your investments now and an investment bond which could be gifted to a trust at a later date. This may be more efficient than a general investment account, particularly given the changes in capital gains tax (CGT) and dividend allowances. Also look to potentially reduce charges by consolidating your investments on to one platform.

When drawing an income from a portfolio, I suggest first drawing from cash, perhaps keeping as much as three years’ worth of withdrawals in cash. This is to avoid having to make withdrawals [from investments] at an inopportune time such as a market crash. It ties in well with the level of cash that you currently hold.

Another option could be to take the natural income generated from dividends and interest. But this could mean more risk, and a variable and not necessarily regular income because some funds pay monthly, others pay quarterly and some once a year or less. You will need to regularly review your rate of withdrawal and continue to test the robustness of your portfolio to maintain that rate.

Petronella West, chief executive officer of Investment Quorum, says:

Your income requirement of £72,000 a year in five years' time, which I assume is net of tax, might be a bit ambitious with assets of £1mn, given the current economic situation and market volatility. However, your portfolio is in pretty good shape and your investments include a number of excellent investment trusts.

If you both qualify for full state pensions at age 67 this could bring in £203.85 per week each and this guaranteed income could mean drawing less from your capital over time. So check if this is the case at www.gov.uk/check-state-pension and, if not, fill up any payment gaps.

Also consider reducing the risk of capital that you will need in the shorter term by holding it in lower-risk assets such as cash, short-duration bonds and money market investments. Longer duration bonds can be more volatile and owning short-duration bonds would be more advisable due to the risk of further interest rate hikes.

We also advocate using NS&I Premium Bonds, which you could each put up to £50,000 into, and other NS&I products – especially because of their greater guarantees on savings. Most banks only guarantee your savings up to a value of £85,000 whereas NS&I are the only provider that secures 100 per cent of your savings however much you invest with them.

Give due consideration to unexpected cash calls on assets which could be funded by cash reserves – think about how you will fund these. Savers can earn interest of over 4 per cent a year on cash as long as you make sure it is not languishing in traditional bank accounts which are notoriously poor at offering competitive rates of interest. 

Although you are not keen on investing in bonds or property, due consideration should be given to these asset classes now that interest rates across the world are normalising and global inflation seems to be reaching its peak. 

Medium-term money needed in about five years should have a more balanced approach and target an income yield to meet further income requirements. Many companies now pay dividends [again following a hiatus after the outbreak of] Covid-19. We are fans of a total return investment strategy which targets both income and capital growth.

Your portfolio includes some great thematic investments which should be retained for longer-term growth. You can balance their risks when you have a financial plan to cover short-term needs. Think about using different pots [of money] for different strategies and timeframes.

Your portfolio doesn't include any commodity investments, but when economies emerge from recession there are often big movements in this sector.

If you want more certainty on retirement income, consider annuities as these look much more attractive now that interest rates are higher. Consider index-linked annuities and, if your health deteriorates, you might qualify for enhanced annuity rates.   

Make full use of your annual Isa allowances by transferring investments from the general investment account into them. Although the reduction in the CGT allowance means that you are now more likely to have to pay CGT on sales of unwrapped investments, still sell an investment if it is the right thing to do.