Improving in-retirement portfolio

[jonesa1]

I took early retirement (aged 57) about a year ago. Approximately two thirds of my net income is provided by a DB pension, the rest comes from dividend payments from ITs held on AJ Bell's platform in ISA and Dealing accounts. The current make up of the IT portfolio is listed below (apologies for the less than marvellous formatting, I need to learn how to do this properly). I have a small SIPP, also with AJ Bell, this results from transferring a small DB pension, rather than take an additional small pension when I'm 65.

I would be grateful for suggestions on how I might improve the portfolio to better match my requirements. Or should I just leave it alone? I tinker far too much and I'm aiming to stop.

DB pension: better, I suspect, than many people can look forward to, but far from gold-plated. Just over half the pension has statutory LPI (CPI up to 5% or 2.5%), the rest has discretionary increases and my ex-employer is currently defining "discretionary" as "zero" from 2021. Effectively this means the value of the pension will decline in real terms.

State pension: in about 9 years I will be eligible (unless the rules change again) for the state pension. Currently 4 years short of NI contributions for a full pension.

Investments: the capital originated from a combination of a S&S ISA plus AVC (stopped paying into this after Equitable Life imploded) and DC pension (my DB scheme was closed a few years before retirement) taken as a cash lump sum when I started drawing the DB pension.
My objective is to provide enough income to maintain my standard of living and which grows ahead of inflation to offset the decline in DB income. The current dividend yield is about 3.7%.
The rationale behind ITs is 1) the lower holding charges compared to funds - although I could switch platforms, 2) the ease of finding information about ITs compared to funds and 3) the ability of ITs to smooth income flows
There is a bias towards ITs which don't rely on using capital to provide income and a bias towards those that have a track record of growing dividends ahead of inflation
I may need to sell some of the portfolio in a few years to help children with mortgage deposits (not certain this will be needed)

SIPP: this is invested fairly evenly across Scottish Mortgage, Finsbury and Edinburgh World Wide. The rationale being that over the next n years they may increase significantly in value and if they don't, I haven't lost a great deal. The plan is to largely ignore the SIPP, simply making sure there's enough cash to pay the platform fees. In total it's about 5% of the size of the ISA & dealing account portfolio

Notes:

• The DB pension means I don't have to be as cautious / defensive as I would if the portfolio was my only source of income
• I've focused on dividends, rather than overall return, its possible I would be better off allocating at least some of the portfolio to growth orientated investments and selling capital to provide income - not sure I'm entirely comfortable with that approach though!
• cash deposits are pretty small, at about 3%
• the IT yields are calculated, based on current share price and historical dividends adjusted where there are stated intentions about future payments.

Code: Select all

IT                                              Yield      % of portfolio
Bankers Ord (LSE:BNKR)                          2.12%     11.1%
City of London Ord (LSE:CTY)                    4.39%      10.8%
Henderson International Income Ord (LSE:HINT)   3.28%     11.0%
Henderson Smaller Companies Ord (LSE:HSL)       2.52%      7.9%
HICL Infrastructure Company Ord (LSE:HICL)      5.16%     9.6%
JPMorgan Claverhouse Ord (LSE:JCH)               3.90%    10.8%
Lowland Ord (LSE:LWI)                            4.37%     8.2%
Murray International Ord (LSE:MYI)               4.40%    11.1%
North American Income Trust Ord (LSE:NAIT)       2.78%     9.5%
Schroder Oriental Income Ord (LSE:SOI)           3.69%     10.0%



[Alaric]

My objective is to provide enough income to maintain my standard of living and which grows ahead of inflation to offset the decline in DB income. The current dividend yield is about 3.7%.

You perhaps also look to measure by how much the income increases every year. If much of your DB Pension is fixed in money terms, your investments outside that have to make up the difference. Also compare your total income to your total expenditure. Is your net wealth outside your DB pension expanding or contracting?

ITs will stabilise your year by year income for you, given that they have to balance the requirement to distribute most of the dividends they receive with a convention that they don't cut dividends for the sake of it.

[nmdhqbc]

I see that about 50% of your investment trusts are managed by Janus Henderson. I find myself in a similar situation. Can anyone else advise us as to whether this is a risk? Do they end up in the same or similar investments because they use the same research perhaps?

[xxd09]

All looks OK to me-if it produces the required income
I would not rush to do anything drastic
I use Index Trackers-2 funds only -a world Equities Fund and a world Bond Fund -Vanguard
Funds are Accumulation type-just sell no of shares as required - once a year into a cash account- keep 2 years living expenses at all times
Simple,cheap and easy to keep track of as you get older
Retired at 57-now 72-System seems to work
Perhaps something you could work towards after more reading -John Bogles books,Monevator web site and Lars Kroijer,s book and videos plus this website
xxd09

[fca2019]

xxd09 beat me to it! My thought also is you could add an global index tracker. To get global exposure, and also to diversify funds and track the market at low cost.

I am a novice investor myself, and dream of early retirement at 57! (Thanks for sharing the info.)

However thoughts, are you could gift £3k per year (plus unused £3k from previous tax year) to children, towards house deposits, which would build up and be accessible to them. That may save you having to sell your investments down the line. Other thought is to bed and ISA each year to reduce amount in dealing account, if not doing already.

[Dod101]

Another Janus Henderson trust, but Henderson Far East would be worth considering because of its yield and geographical spread. Could replace Henderson Smaller Companies.

I would be inclined to get a better spread of managers and introduce another generalist trust from say Baillie Gifford or go for the boring City of London since you are looking for income and you are not running your own high yield portfolio.

Otherwise I think your strategy makes a lot of sense.

Dod

[EthicsGradient]

If you'll still be a basic rate taxpayer, you could pay into your SIPP the amount allowed for everyone, even if they're not earning - £3600 gross/year, or £2880 net. The increase you get from the contribution having a quarter added to it outweighs the tax you pay when you withdraw - £1 becomes £1.25, but when you withdraw it, a quarter is tax free, so you pay tax on it at 20% * 75% =15%. What's more, the government has lent you £720 for each year you pay in, interest free, until you withdraw it.

So, say it grows at 4% pa, for 5 years (contribute when you're 58, withdraw it when you're 63; contribute at 59, withdraw at 64, etc.). £1 becomes 1.25 * 1.04^5 * 0.85 = £1.29 (equivalent to 5.3% pa growth). Outside a SIPP, that would be £1.22.

That could also help your available income in later years, which was part of your objective (contribute for 5 years, withdraw for 5 years, and then your state pension will start). Unless you ever want to withdraw so much in one year that it makes you a higher taxpayer, you're also in the position where you're not tying the money up for a long period or facing a penalty for accessing it - you can stop paying in and start withdrawing at any time.

The down-side to that could be that you could want a large lump sum in one year, for those house deposits. You'd have to be happy taking that from your ISA.

[monabri]

Assuming no adverse health conditions, fill out your NI Voluntary class 3 contributions prior to reaching state pension age. That should net you a 30% return every year at very (very ) low risk.

[tikunetih]

Are you single? If not, then ensure you look holistically across both parties' finances, including ensuring you're making appropriate use of pension contributions for any tax-relief uplift and some shielding from IHT, if relevant.

[monabri]

Based on the ITs listed above, you have (approx)

56% in Euroland (46% UK)
24% in Americas (20% USA, 2% Canada, 2% Latin Am)
20% Asia

I wonder if it is worth looking further afield than the UK? Dod mentioned Henderson Far East (HFEL) as a possible candidate for income (I also hope for growth in income).

Vanguard High Yield (VHYL), an ETF, would also increase globality with an income (albeit not exactly "high yield" as the name on the tin would suggest).
(It is a low cost ETF).

[gbjbaanb]

All I can suggest from that is to look at the geographical allocations of your trusts - Claverhouse, CTY, half of Bankers etc are all UK, probably invested in the same shares. Might be worth moving some of them into a couple of different trusts with better yields, one of the many REITs (TR Property is a trust that invests in other REITs, might be more appropriate than, say Regional REIT) or a bit in some sector specialists like heathcare to gain more diversification.

[fca2019]

Some great advice on this thread, and I am learning here. However if you follow all advice...

a Far East IT, a generalist IT, pay into a SIPP, gift to children, NI voluntary contributions, Vanguard high yield ETF, TR Property IT ...

the OP might need to go back to work to pay for it all

[jonesa1]

Thanks to the folks who replied.
Alaric - I will be tracking year on year dividends, so I will know whether the approach is working. At the moment I have more income than gets spent.
nmdhqbc - the over-representation of Janus Henderson is a concern, but probably not a massive risk, the funds are managed by different people
xxd09 - I've read much of the Monevator website and followed the forums on this site for a few months. I understand the rationale behind passive investing and the idea that in the long term asset allocation matters more than specific funds / stocks. I have the DB pension, which means I don't feel the need to own bonds to stabilise the portfolio, if all my investments dropped to zero value, I'd still have enough income to manage. One day I may switch to passives, that day isn't here yet.
fca2019 - with HINT, MYI, BNKR, SOI and NAIT there is already quite a bit of global exposure, so the decision is whether to stick to active, rather than passive and if so, whether these are the most appropriate funds to own. At the moment we (myself & partner) are subbing one child's London rent to the tune of more than £3k pa and we're about to start doing the same for a second child (starting salaries in London are not in line with rents, let alone property prices). Already done my first bed & ISA
Dod101 - There seems to be a large overlap between HFEL and SOI, which I already own. CTY is already one of my largest holdings. Rather than replace HSL, I'd be inclined to replace LWI (HSL has very little overlap with CTY or JCH, unlike LWI), probably with another global fund, so long as it's not more of the same as BNKR, HINT & MYI
EthicsGradient - I've looked at the option of adding to the SIPP, for a basic rate taxpayer it would give a net 6.25% benefit after the uplift and tax at withdrawal. As I would effectively be recycling income from my ISA, I'm yet to be convinced it's worth it. I could simply re-invest within the ISA for no tax on any income, no potential for capital gains tax and lower costs of withdrawal.
monabri - already plan to pay voluntary NI contributions, once I get a bit nearer state pension age. It would seem daft not to! VHYL could be a good way to dip my toe into the world of passive investing. Might VWRL or VEVE be better options? Less income, but less of a value slant and so likely to offer something different to the global ITs I already hold?
tikunetih - that's a good point, I'm not single. My partner still works and will have less generous pension arrangements when she decides to retire.
gbjbaanb - I've been following the tale of New River Reit, but that's probably not the Reit for me! I had been looking at Picton (rather than Regional or TR Property), to provide a bit of diversification, it features in some of the Money Observer portfolios. Any thoughts on Picton? Assuming I reduce the UK allocation (e.g. by selling lowland), would the proceeds be better spend on diversifying asset class (e.g. Property or Private Equity), or on increasing the allocation to global equity? Bearing in mind my risk profile?
fca2019 - after a year off, I fear I'm now unemployable

[monabri]

Might VWRL or VEVE be better options? Less income, but less of a value slant and so likely to offer something different to the global ITs I already hold?

The difference between VWRL and VEVE being that VWRL contains shares from China, Taiwan & India.

As I understand it : Some people go for VWRL on it's own (simplicity) and some for (VEVE + VFEM) - the latter combo having slightly overall lower charges. The "ratio" generally being

100% VWRL == 90% VEVE + 10% VFEM

VFEM re-introduces the "emerging markets" (slight misnomer that China is emerging but that's Vanguard's view!).

Increasing the percentage of Vanguard Emerging Markets (VFEM) would increase the "spiciness".




N.B. I compiled these tables a few months ago so the data is only for illustrative purpose - please refer to VG's own datasheets.

[jonesa1]

monabri, thanks a useful chart. I was aware of the difference (in general terms) between VWRL and VEVE. My question was more about whether they would be a better fit with the rest of the portfolio, which is quite value heavy, than VHYL which is also going to be value focussed.

[vrdiver]

Just a comment on the SIPP pension contribution; pay in £240 per month, withdraw an additional £300 per month - you are committing £240 to earn £180 a year ( as a BRT payer). It might not be much, but when managed monthly it's a lot more than 6.25% - and a pleasant meal out, courtesy of "Henry" is always a joyous experience...

The other comment I'd make, is whether you can find something to allow you access to class II NICS rather than class III ? Perhaps some eBay selling, or a stint of self-employed author etc? Even filling in a survey for a payment reward would count as self-employed, at which point you are eligible to elect for the voluntary cheaper class II NICS. At the current price I'd probably knock out the missing years sooner rather than later: if you shuffle off, it's pretty immaterial, but if you live to draw the OAP, it's a much better bargain!

VRD

[jonesa1]

VRD the monthly deposit and withdrawal scheme works if already making monthly withdrawals from the SIPP, but as my SIPP is too small to justify the regular withdrawal charges (£100 pa, or £25 per ad hoc withdrawal), when I withdraw it's likely to be in proportionately large chunks once per year at most. It's not worth the effort of moving the SIPP to another broker for a gain of £15 per month minus selling costs and withdrawal charges

Class II NICS is worth investigating further, I think you can only top up missed years and so far I've only missed most of one and part of another.

[77ss]

....
[*]I've focused on dividends, rather than overall return, its possible I would be better off allocating at least some of the portfolio to growth orientated investments and selling capital to provide income - not sure I'm entirely comfortable with that approach though!
....

I would cetainly give this some thought. You have zero to low yielding growth ITs in your SIPP - but if I read your post correctly just 5% of your holdings.

If your current income exceeds your needs then you are in a position to sacrifice a bit of dividend income in favour of capital growth. I was in this position some 7 years ago, when my pensions had started to kick in, and have not regretted gradually switching my attention to growth and away from dividends (individual equities as well as ITs) and am currently about 20% in sub-2% yielders.

If you need all your dividend income, then thats another matter. But even so, keep the thought in mind for the future - perhaps when your state pension starts.

Others have mentioned broadening your geograpical exposure. You could do a lot worse than look at Foreign & Colonial (or similar); only about 1.6% yield, but try comparing its total return with those of your existing holdings. Personally, I think that the nice dividend income from CTY comes at the expense of capital.

[gbjbaanb]

gbjbaanb - I've been following the tale of New River Reit, but that's probably not the Reit for me! I had been looking at Picton (rather than Regional or TR Property), to provide a bit of diversification, it features in some of the Money Observer portfolios. Any thoughts on Picton? Assuming I reduce the UK allocation (e.g. by selling lowland), would the proceeds be better spend on diversifying asset class (e.g. Property or Private Equity), or on increasing the allocation to global equity? Bearing in mind my risk profile?

Buy low, sell high! New River is hit by having a lot of retail property, and this woodford thing going on. Could happen to anything, like the "safe" infrastructure stocks getting hit by Interserve (or was it Carillion, or Capita)... I woulnd't buy it though, if a recession is coming, the high street will be hit even harder.

I suggested TR Property trust as it is a reit-of-reits, not owning property itself, but spreading out a load on others. You could do the same by buying a few different ones, like Regional REIT or even just pick a few and put a little into each. You could add a little of student accomodation or healthcare or warehouse property as there's REITs speciaising in those too. they all tend to pay good dividends. The Fool REIT board has more. I'm not sure of Picton, doesn't appear in my lists on the AIC site and I've not heard much about it, apart from a faild fund raising recently.

I would sell one of the poorer performing UK based trusts and buy a few others to increase diversificiation - that's the way to derisk generally. IBT, RGL AEMC, and EGL would be my quick suggestions.

[jonesa1]

In the end I've opted to boost the capital growth potential, reduce UK exposure, increase global exposure by selling Lowland and buying Mid Wynd International. Now I just need to leave well alone.