‘We have £250k of investments but rent in our 50s – how do we guarantee a comfortable retirement?’

Money Makeover: our readers want to make their investments effective for later life

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Darryl and Erica Connolly live in a semi-detached cottage on the rural outskirts of Sherborne in Dorset. They could easily afford to buy a home but have decided to invest in assets other than property. 
“We’re happy renting,” Mr Connolly says. “We’ve lived in beautiful houses in Wiltshire and Dorset over the years – a 15th century thatched cottage, an annex to a manor. Renting gives us flexibility.”
Mrs Connolly, 56, is a self-employed colour therapist and Mr Connolly, 60, works as a nurse for the NHS. He loves his job and wants to carry on working as long as he can.
Even so, the couple’s thoughts are turning to retirement and how to ensure they have enough income to ensure a reasonable lifestyle in their later years. 
Between them they have an NHS pension which will bring in £6,000 a year, and two private pensions worth £40,000 and £28,000. 
They have £245,000 of investments: a mix of shares, unit trusts, “community energy” bonds and shares, Enterprise Investment Schemes (EIS), company bonds, gold bullion, cash Isas, and fixed-rate cash accounts. To date they have made returns of around 10pc a year, and are conscious about making ethical investments. 
The couple immigrated from New Zealand 25 years ago. They also own a plot of land in their native country worth £92,000, an asset that they expect to appreciate over time. They save around £200 a month after rent and bills, and tend to invest their savings. 
Mr Connolly wants to keep working part-time past retirement age. “Our goal is to have a guaranteed and consistent income source in addition to any income from our work,” he says.
“We live a fairly simple life but just want to be able to maintain a comfortable lifestyle as we get older.”
“We’re not big spenders, but we do like travelling. We want to go to Costa Rica and the less well-trodden parts of the US.”
Darryl and Erica are in a reasonable financial position, but there are a few key areas they can explore to prepare for the future.
Reviewing your pension arrangements is essential. While you both have some pension provision it is relatively modest, especially if you’re looking to maintain flexibility and a comfortable lifestyle.
One of the best ways to maximise this part of your portfolio is by making additional contributions while you’re still working.
Pensions are incredibly tax-efficient, as any contributions made now will benefit from tax relief, meaning for every £100 you contribute, it could only cost you £80 after basic rate tax relief – or even less if you’re in a higher tax bracket. This assumes rules remain the same as they currently are. 
Given the flexibility Darryl has in his future work plans, continuing to build up pension savings while working part-time after 67 would help bolster future income without needing to access your investments too early.
This money could then be used to buy a secured income with an annuity, which would provide a level of guaranteed income the couple have asked for. If the annuity terms are not favourable (and remember annuities are relatively inflexible) the money can remain invested and you can draw down on your portfolio as and when you require cash.
It’s also essential to check your state pension forecast. This could make up a significant portion of your income in retirement, particularly since you’ve both worked for many years. 
Your decision to continue renting gives you a great deal of flexibility, but it does mean that you’ll need to factor in ongoing housing costs throughout retirement. Without owning your own home, rent will be a significant outlay and might impact your disposable income later on. 
While you’re happy renting for now, it’s worth considering how this fits into your longer-term financial plans.
Your investments, meanwhile, are diverse, and it’s great to see that you’re focused on ethical investments. However, there could be some overlap in the funds you hold, especially with ethical investments, which sometimes concentrate on similar companies. It may be worth reviewing your portfolio to ensure that you’re not duplicating risk unnecessarily.
One way to simplify this is by consolidating your holdings into a managed ethical portfolio, structured to your risk tolerance. This could also provide the added benefit of generating dividends, offering a stable income source that would supplement your pensions. 
Although you say you have received above-anticipated returns on these investments, there will be periods that you go through significant downturns during bad market conditions, as you are mainly invested in the stock markets.
I would recommend you consider your risk position post-retirement, if you are drawing from these funds and the market declines, you may run out of funds sooner than expected.
In terms of the land you own in New Zealand, while this could appreciate over time, it’s worth considering whether the asset is meeting your goals. Without a tenant or other income generation from it, it doesn’t contribute to your immediate income needs. 
If you don’t have a clear use for it in the future, you could consider selling and reinvesting the proceeds into an income-producing asset, which may better support your lifestyle aspirations. 
Darryl and Erica are in the latter stages of the accumulation phase – building as much into their retirement pots as possible.
A comfortable retirement could cost the couple £59,000 a year annum, according to research by the Pensions & Lifetime Savings Association.
However, these figures assume that people are mortgage or rent free in retirement. The couple will need to factor in rental costs and therefore could need more than this. 
They should assess their spending needs – both now and in retirement – and think of a realistic amount they will need each year to continue to enjoy their lifestyle. A broad-brush approach could be aiming to generate 70pc of pre-retirement income. 
This could be substantially more than they have saved for but will be mitigated by continuing to work in a part-time capacity.
A good plan provides the right balance between security and access to capital. The couple should check their entitlement to the state pension as they will need 35 years of National Insurance contributions to benefit from the full amount of just under £12,000 a year each (increasing in line with the triple lock).
Darryl and Erica will be entitled to their state pensions at 67 – coinciding with Darryl reducing his hours to part-time.
They also have another fixed income source in the form of their NHS pensions and will benefit from another £6,000 a year. Not including part-time earnings, this will provide a pre-tax fixed income between them of around £30,000 in today’s terms which will increase with inflation. There will be tax to pay from these income sources.
In addition to these guaranteed income streams, they have private pension pots of £40,000 and £28,000 along with a small Sipp. This pension provision looks a little light, so continuing contributions to their pensions over the next few years should be a priority and they will benefit from tax relief by doing so.
They could purchase an annuity with their pension pots. This would provide them with a further source of guaranteed income for life with the option to include inflation-proofing should they wish. 
Darryl and Erica have limited immediate access to cash. They currently have around £10,000 spread across cash Isas, NS&I, current accounts and savings accounts. A suitable emergency fund would be three to six months of essential expenditure. They should keep a separate pot for travelling and holidays.
They have a diversified selection of investments. Some of these are held in tax-efficient wrappers (the Isas and Sipps) while others are held outside of an Isa.
Making use of these accounts would be prudent and potentially doing “bed and Isa” and “bed and Sipp” strategies  (where you sell assets and re-buy them inside these tax-efficient accounts) could be a good option, depending on the couple’s potential capital gains, time frame and tax statuses.
Somewhat surprising is their alternative investments: land in New Zealand and gold bullion. These assets do not produce an income and rely on capital growth. Considering their objective is to provide income in retirement, these sorts of assets are not necessarily suitable for them.
EIS investments are very high risk. They offer attractive tax incentives, however, are generally more suited to those with significant earned income who are looking to minimise their tax bills, having already exhausted other more common areas like Isas and pensions.
With one eye on retirement, and a shorter time frame before needing to draw on their investments, I would encourage a review of their objectives and risk. Typically, investors will look to de-risk approaching pension age and it is common to restructure investments towards an income mandate to help fund retirement.