ISA portfolios for those at, or approaching, retirement

It’s quite an interesting exercise when you type ‘Why invest in an ISA in 2021?’ into your computer’s search engine.

Quite frankly most of it is advertising. The first few links talk of the tax benefits, quickly followed by the “x amount of trends that will boost your portfolio in 2021” stories. Scroll further down and you see discussions of long-term goals and how an ISA can help pay for them. The likes of buying a house, paying for your child’s education and, lest we not forget, the flashy car and holiday home everyone seems to want.

But one area which is not covered in as much detail as it should be is what investors should do with their portfolios when they are either at or approaching retirement. This is known as moving from the accumulation to the decumulation stage – basically your mind shifts from growing your investment pot to preserving it.

Life expectancy is a big point. Research from Aviva shows the average global life expectancy increased 5.5 years between 2000 and 2016. This means the average 65-year-old in England could expect to live, on average, to almost 84 if they’re a man, and 86 if they’re a woman*.

Making your money last 20 years will require a bit of thought. I recently read that to live comfortably in retirement in 2020 a couple in the UK needed an annual combined income of £47,500 to have a retirement with few or no money worries, while a single person would need £33,000**. I’m not going to go into pension shortfalls but, if you do the simple maths, the average person will need more than £650,000 to last 20 years – minus your state pension contributions of course.

But how to find a balance in your portfolio?

That’s the £650k-plus question! Investors must consider how much (if any) they plan to leave behind for their loved ones, while also accepting that, over a 20-year period, their investments will be exposed to bouts of volatility.

Some may want to withdraw money from the portfolio’s capital in retirement, while others may wish to leave it untouched and rely solely on the income it makes. You also have to consider things like the reliability of income. Take 2020 as an example, where we saw major cuts in dividends across many UK companies due to the pandemic. Concerns like inflation, which can erode the value of your investment pot, also have to be accepted as major possibilities in the next 20 years.

So how best to go about it? There is an old adage that you should hold as many bonds as your age to ensure you strike the right balance between generating returns and lowering your risk profile as you get older. So a 60-year-old should have 60 per cent of their portfolio in bond funds. However, as people live longer, that notion is becoming increasingly obsolete. Thankfully, there are plenty of other options to help you build a sensible ISA portfolio for retirement. Below is a simple framework to help investors get started.

Core holding – 40 per cent

I would start with a multi-asset vehicle, with capital protection at the heart of its investment process. Managed by David Coombs, the Rathbone Strategic Growth fund targets cash plus 3-5 per cent per annum over a minimum five-year period and has a big focus on delivering this via a risk-controlled framework. It’s also well diversified and relatively cheap, with an ongoing charge of 0.67 per cent***. An alternative could be the BMO MM Navigator Distribution fund, which has a yield of 3.9 per cent****, or our own VT Chelsea Managed Cautious Growth fund.

Income – 20 per cent

I would then turn my attention to income funds. I’d start with a rock-solid UK offering like Artemis Income, and supplement it with a global version like Fidelity Global Dividend, where manager Dan Roberts is again cautious in his approach as he looks to protect investors from falls in markets.

Corporate bonds – 20 per cent

You’ll also want a couple of bond funds in the mix for income. The TwentyFour Absolute Return Credit fund has an excellent track record of preserving capital and delivering strong risk-adjusted returns, while the Liontrust Monthly Income Bond has been an excellent performer in the past five years, while also yielding 4.6 per cent^.

Global – 20 per cent

Presuming your investment would need to last two decades an element of growth will be essential. For this I’d look to global equities with a fund like JOHCM Global Opportunities. Managed by Ben Leyland, the 30-40 stock portfolio has a strong bias towards larger and medium-sized multi-national businesses. The philosophy of this fund is 'heads we win, tails we don't lose too much' with the manager happy to hold large cash positions if necessary. Another option is Morgan Stanley Global Brands, whose team’s mantra is ‘don’t lose money’.

*Source: Aviva – How long will my retirement be?
***Source: Provider factsheet at 31 January 2021
****Source: Provider factsheet at 28 February 2021
^Source: FE Analytics at 12 March 2021

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.

Published on 15/03/2021