'Is my £580,000 Isa ready for retirement?'

Retirement brings a lot of lifestyle and financial changes, including how you deal with your portfolio – the shift from contributing to it to drawing from it happens relatively suddenly. So how do you adapt your strategy to your new life?

This is the question our reader John, who is 63 and plans to retire this year from his job as a freelance IT project manager, is asking. He and his wife Marie, 60, are well set up to live comfortably once they stop working. John has about £135,000 in cash in his company to use as a “bridge” to early retirement. At 65, he will start receiving an index-linked final salary pension, currently worth around £64,000 a year. He should also receive the full state pension at 67, while Marie will have a circa £8,500 German pension from the age of 67 on top of the minimum UK state pension and a small NHS pension.

John and Marie have an investment portfolio worth about £580,000, split between two individual savings accounts (Isas). John is aiming for an annual income of about £60,000 net, so he will need to draw some money from his investments to make up the difference. In the long term, he intends to use the Isas to provide additional income for non-essential spending and luxuries.

The accounts are invested in 34 single stocks with varying weights to each. “My strategy is to be a long-term part owner of great companies that are well managed,” says John. “I take a ‘total return’ approach, investing for both growth and income. I try to diversify across companies, industry sectors and geographies and favour multinational companies. My final salary pension behaves like a guaranteed lifetime annuity and will cover my fixed living costs, so I can take more risk with the Isas.”

“I have mixed feelings about investing,” adds John. “I enjoy the research, backing the companies I believe in and being in control of my assets. But until now I have had limited time and knowledge to conduct in-depth research and I worry that I lack the confidence and skills to manage my portfolio as well as ‘the professionals’.” 

John has avoided active funds because he worries about high fees and lack of transparency on the underlying holdings. He has also stayed away from bonds over the past few years because they “provided poor value”.

But he is now wondering how he should adapt his strategy to retirement so that the portfolio provides a sustainable income while still allowing for some growth. He is considering a range of options, including investing more in income stocks, using a core allocation to trackers and adding bonds or active funds. 

John and Marie own their £980,000 home mortgage free, have £100,000 in cash savings, have no children or other dependents and no debts.

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

Louis Coke, director of private clients at Charles Stanley, says:

You have worked hard for many years to build up your finances and approaching retirement can be a natural point to take stock. Your generous final salary pension scheme will undoubtedly underpin your income in retirement but there is a gap between what it provides and what you would like. You will need circa £60,000 after tax in 2025 and 2026. In 2027 your company pension comes in and the shortfall falls to about £12,400. In 2028 the state pension reduces the gap to about £6,000. For the sake of simplicity, I have not adjusted these figures for inflation and changes in pension rates.

Look at how to extract the cash within your company in the most tax-efficient way for 2025 and 2026. This cash may not be enough for your needs, and with equity markets having risen a fair way over the last six months, I would consider some exposure to gilts. You could have £40,000 each in the 3.5% 2025 Gilt and the 0.375% 2026 Gilt. They give good returns over a known period, can be sold when required and the maturity profiles broadly align with when you may need the cash.

If the financial ‘bridge’ you refer to supports you entirely over the next couple of years instead, the gilts will redeem at their maturity dates and the money can be reinvested within the Isa. This approach protects you from a stock market decline over the next couple of years. I would fund the gilt purchases using the portfolio cash and by selling some of the Unilever holding – a high conviction position that may be the result of historical share price gains rather than an intentional choice.

Going from accumulation to decumulation is quite a fundamental shift in terms of the risks you can afford to take and the investment strategies you should look at. I am happy with a high equity content but disagree with the individual investment selection. While I understand your case for choosing individual shares, I would strongly suggest some funds to give diversification and allow you more time to enjoy your retirement. Buying funds does not need to mean dull performance and you should look for managers with similar views to your own – some suggestions are in the table below.

Strategy-wise, your ability to withstand losses may be less than it was historically, but I am comforted by the cash balance and your final salary pension. I would suggest a fairly aggressive allocation with around 10 per cent in bonds and 90 per cent in stocks. I would not invest too heavily into bonds because you are early into retirement. While bond yields may seem attractive now, they do not grow with inflation. 

Some 15 per cent of the portfolio could be invested in your stock picks, with a third of the rest in low-cost tracker funds and two thirds in active stock market funds – seeking to balance your investment values, your ability to take risks, and the creation of a portfolio that should not require too much ongoing work to maintain.

Your point about active funds having high fees and little transparency is well made, but I think using a small number of managers who are aligned to your way of thinking can be very beneficial. I have looked for managers who have ‘skin in the game’ [invest in their own funds], are well established in their fields and can be truly active in their decision making. Here are my suggestions:

Finally, look at how widow benefits work for your pension. They change from scheme to scheme, and I am concerned that if you predeceased Marie, the investments may need to be relied upon far more heavily and need a more defensive asset allocation.

Liam Sweeney, investment manager at Lumin Wealth, says:

Your company pension covers the majority of your £60,000 annual income need, so you don’t need to draw much from the Isa. You can generate that income through dividends, interest or by selling down assets. But each of these comes with its own risks: companies cutting their dividend, a bond default, selling investments at a loss. So I’d still recommend a diverse range of income streams.

You say you are happy with a higher-risk Isa since the pension covers all of your basic needs. But an allocation to gilts can diversify your portfolio and your sources of income. It is correct that bonds were offering poor value over the past few years, but now, with yields north of 4 per cent across various maturities, I believe bonds are attractive again. The Vanguard UK Government Bond Index (IE00B1S75374) offers cheap access to the gilts.

You are investing 100 per cent in stocks with some clear concentration risks, such as the large Unilever holding. Your aim to diversify across industries and geographies and invest in the global economy is sound, but you could further diversify your global exposure with an allocation to a FTSE All World tracker.

You could also consider emerging markets. Given the inefficiencies and often complex nature of these areas, I would suggest an actively managed fund. For example, the Artemis SmartGARP Global Emerging Markets Equity Fund (GB00BW9HL249) combines fact-based screening with growth at a reasonable price – a repeatable process that has delivered consistently solid results since launch.

Don’t be shy of active fund fees. You can blend a handful of active fund positions with a core passive portfolio and still achieve a low overall cost base. A global income fund may be better suited to active management, to avoid value traps or potential dividend cutters. Consider Fidelity Global Dividend (GB00B7GJPN73), which aims to produce an income 25 per cent higher than the world index with a lower volatility.

Finally, your cash amount is high given your risk tolerance and requirements. A portion of this could be used as a source of income over the next few years, but you could invest some of it. A cash pile covering six to 12 months of expenses is prudent. Despite yielding over 5 per cent today, cash hasn’t beaten inflation over any long-term period, so holding it erodes the real value of the money.

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