Retirement case study: how I manage a £2.5m SIPP and ISA portfolio

When it comes to building and managing a retirement portfolio, having strong analytical skills and a firm grasp of the UK tax system are rather handy attributes. I recently spoke to a retired investor, aged 62, whose former career covered both these areas, plying his trade as a chartered accountant in the life sciences sector.

“I’ve always believed it makes sense to manage your own money if you’re confident enough to do so. It takes time to get your head around, but it’s not rocket science. And as my background is financial, it’s something I enjoy doing,” he says.

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The investor and his wife’s diligent approach to wealth creation has enabled them to reach retirement in an admirable position, mustering a combined self-invested personal pension (SIPP) and individual savings account (ISA) portfolio north of £2.5 million.

“It didn’t happen by accident – it took conservatism and a level of responsibility,” he says.

He left full-time employment five years ago when the Covid pandemic hit, which he says proved “a dress rehearsal in spending more time at home”. He switched to part-time for a period, dropping down to two to three days a week to phase into retirement, and fully downed tools around 18 months later.

Alongside his accountancy career, the investor co-founded a biotechnology firm and, while he still does some “unpaid bits and bobs”, he considers himself “95% retired”. He says these voluntary commitments “aren’t huge” and adds “if I feel like I’m still contributing and enjoying it, I’ll do them but if not, I’m happy to step back”.

Breaking things down into pots

A core task facing the couple now is to ensure they use their retirement wealth effectively, striking the balance between enjoying life today while keeping an eye on the future.

A central cog in this wheel is to adopt an appropriate investment strategy. The investor describes his approach as cautious, with the portfolio structured in a way to manage the risks specific to income drawdown. “Part of the trick when managing risk is to spread it around and diversify. I want to be able to sleep at night. I don’t want to be widely exposed to volatility.”

As such, the portfolio is segmented into various buckets, comprising roughly 50-60% equities with the rest allocated to fixed interest and money market funds. Recently he has been recycling funds out of money markets and into fixed interest to hunt for better yields. The investor also uses a gilt ladder to create a steady stream of income over time while mitigating risk, and is not afraid to chop and change investments, taking profits on funds and investment trusts he’s held for a while “to lock in gains.”

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The bulk of his portfolio is in core holdings, which include funds such as Ranmore Global Equity, Artemis Monthly Distribution, Artemis Global Income, Orbis OEIC Global Balanced as well investment trusts such as Temple Bar Ord (LSE:TMPL). He’s particularly fond of the TwentyFour Income Ord (LSE:TFIF) and TwentyFour Select Monthly Income Ord (LSE:SMIF) funds, which are both bond specialists. “They’re high-yielding funds, so there’s risk, but it’s manageable risk,” he says.

The second pot focuses on thematics, with the L&G Gold Mining UCITS ETF, HANetf Future of Defence ETF Acc (LSE:NATO), Pantheon Infrastructure Ord (LSE:PINT), and Amedeo Air Four Plus (LSE:AA4) among the current holdings. And to add some spice to his portfolio, he also trades a relatively small portion in individual shares including Diploma (LSE:DPLM), Rolls-Royce Holdings (LSE:RR.), Volution Group (LSE:FAN), Games Workshop Group (LSE:GAW) and some smaller, higher-risk holdings such as Serabi Gold (LSE:SRB) and Ramsdens Holdings (LSE:RFX).

The investor, who diversifies assets and products across various platforms, runs spreadsheets and uses investment analysis software to monitor holdings, which he explains “is a bit fiddly but it’s not too much of a chore”.

With regards to an income strategy, the investor focuses on taking enough to live comfortably while keeping things tax efficient. “We consider ourselves modest spenders – we draw enough to live the life we want. I believe it should be a smooth transition into retirement, where your lifestyle remains broadly consistent to your working years.”

By what he suggests is “more luck than judgement,” the couple’s investments held outside SIPPs and ISAs produce income that falls just beneath their respective personal and savings allowances. This means they don’t currently pay income tax on that income and are not currently drawing from the SIPPS or other taxable sources. “This will obviously change as time goes on,” he explains.

Focusing on things within your control

Given the size of their joint portfolio, the investor and his spouse will see their taxable estate increase dramatically from April 2027 when unspent pensions are brought into the scope of inheritance tax (IHT).

Some investors are already seeking to get ahead of the reforms by drawing from pension assets sooner than previously intended, and either spending the money or gifting it to younger generations. The investor, however, isn’t planning to drastically alter his approach. 

“As time goes on, I might draw more from SIPPs than I would’ve otherwise, but it hasn’t really affected my planning as I manage my various pots as one, so make little distinction between SIPPs and ISAs in this regard.”

By contrast, he remains wary of further tightening to the estate planning landscape. “I’m much more concerned about what the government might do with the ability to pass down assets per se and where IHT might be headed more broadly.”

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However, the investor stresses that his aim in retirement is to “enjoy my golden years” and not get distracted by how rules and regulations shift over time. “If you base your decisions on legislation, you’re always playing catch up, and even worse trying to predict where you think the rules might end up. It’s a pain trying to manage life like that.”

On the subject of gifting his portfolio, the investor says this is something that’s on the horizon, but his children are younger and don’t need much financial support just yet.

The tax-free cash conundrum

Speculation about how the pension system may change is cranking up ahead of this year’s Autumn Budget, with mooted reforms to tax-free cash once again swarming the headlines.

In the lead-up to last year’s final set piece event, rumours ran wild that the government was considering cutting the maximum amount available from £268,275 to £100,000 – it didn’t happen. This sparked a sharp uptick in the volume of savers making tax-free withdrawals from their pension plans, which has remained high since, exacerbated by continued fears about a tax raid and the impending IHT change.

“I took my tax-free sums when they were available, and the money has been recycled into ISAs or otherwise deployed into assets that will be drawn to live off,” the investor says. “I’m glad we took that approach as who knows what will happen with tax-free cash in the future. I’m actually surprised the government hasn’t already clamped down on upfront pension tax relief.”

The road to retirement

While the investor has kept a close eye on his finances throughout his working life, it was in the final five to seven years before retirement that he took a more active role.

“We’ve tried to make use of our annual ISA allowances where available but have only managed to plough in the maximum in the past decade. When we were in the earlier stages of life there were other calls on our funds, such as paying off mortgages and supporting our kids.”

Another decision that paid off was to switch his workplace schemes into SIPPs, allowing greater flexibility and choice over how his money is managed.

“Transferring out of company pension schemes and into a SIPP is something I’m a big advocate of. The thing to watch is fees - you need to make sure you’re not cutting off your nose to spite your face. As in, you may be better at managing risk in your funds but without dure care, you could increase your costs. Fees aren’t the be-all and end-all, but platforms fees are something you need to look at carefully.”

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In terms of other income, the investor has a legacy, defined benefit (DB) scheme that will kick in at age 65 and he can claim the full state pension at age 67. “We also topped up my wife’s national insurance record as she didn’t have the full 35 [qualifying] years,” he adds.

The future of the state pension is never far from the headlines, and changes could be afoot after the government recently launched a review into the state pension age. While the investor appreciates policymakers have some tricky decisions to make regarding its ongoing affordability, he hopes the state pension isn’t too heavily meddled with and is strongly against the introduction of means testing.

“One mark of a decent society is to provide a reasonable minimum level of retirement income for all those who’ve paid into the system throughout their careers. To keep chipping away at the framework is not a good look.”

Pearls of wisdom

Anyone who reaches retirement in such rude financial health will have learnt a thing or two along the way. The investor says his interest in money management grew as he progressed through life and his investing knowledge and nous deepened.

“I can understand why people don’t take a lot of interest in money. It can seem quite boring but got me and my family into a good position. It’s important to set a number to know what you need to live a decent retirement and use your tax-free allowances where you can. If you’re lucky to have money to invest, you need to make sure it’s deployed in the most appropriate way.”

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The wave of financial challenges facing younger people has been well documented. With disposable income squeezed, saving for retirement is often shunted down the pecking order, beneath getting a foot on the property ladder. But the importance of making the most of your company pension is something younger generations should not overlook, according to the investor.

“If you’re working for someone who offers a generous pension, then take it – it’s free money. And maybe that’s all you need to do when you’re young.”