Here's How I Hope To Retire

Published in Investing on 11 June 2012

A pensionless Fool explains his investment strategy.

"In 2008, 45 per cent of self-employed men working full time in Great Britain belonged to a personal pension scheme according to the General Lifestyle Survey, compared with 64 per cent in 1998-99"

Office for National Statistics: Pension Trends report, May 2010

That's a lot of self-employed men without any pension arrangements -- and I don't mind admitting that I'm one of them. However, I do have an alternative plan that I hope will provide me with a largely tax-free and passive income when I retire.

What kind of Fool am I?

After leaving university, I only spent six years in employment before becoming self-employed. Back when I was a corporate creature, I had not seen the Foolish light and, although I did contribute to a company defined benefit scheme, I only paid in the minimum.

When I first became self-employed, some years ago now, money was a bit tight and setting up a personal pension plan wasn't my top priority. However, my interest in investment started at around the same time, and it wasn't long before I realised that I did need to do something -- however small -- to save for my old age.

Pension or ISA?

The first thing to decide was whether to build my retirement savings in a pension or a stocks-and-shares ISA. The tax advantages are similar -- broadly speaking, you either pay tax on the contributions (ISA) or tax on the eventual income (pension), but not both.

For me, the decision to start with an ISA was easy. I can trust myself not to use the money, and I much prefer the idea of remaining in control and being able to decide when and how I retire, regardless of what the government of the day decides to do with pension legislation.

What's more, I'm not alone in advocating ISAs as the best way to build up a lump sum to retire on. You can find more ideas for using an ISA to save for your retirement in this free Fool report, "10 Steps To Making A Million In The Market".

What's in the ISA?

The first part of my plan was simple and relatively foolproof.

I am a keen believer in the attraction of big-cap dividend shares for long-term income. Accordingly, the majority of my portfolio is invested in companies such as Royal Dutch Shell (LSE: RDSB), HSBC (LSE: HSBA), Aviva (LSE: AV), Vodafone (LSE: VOD), GlaxoSmithKline (LSE: GSK) and Unilever (LSE: ULVR) -- in total, a dozen of the biggest and best dividend-payers in the FTSE 100.

This is, of course, a High Yield Portfolio (HYP), as advocated and used by the very Foolish Stephen Bland. In my case, each holding is in a different sector, with an equal amount originally invested. Dividends are not automatically reinvested but left in cash in my ISA. Periodically, I reinvest them into one of the HYP shares, topping up the holdings to benefit from the highest yields but keep the weightings roughly equal.

Is that all?

Not quite. I'm still young enough to want to try and beat the market with outright capital gains and to be able to afford the risk of the occasional loss.

I invest the remaining minority of my portfolio in a small number of value or growth shares that I hope will deliver capital gains over the medium term. Profits made from these investments are split, 50/50, between the permanent HYP, which I never intend to sell, and my capital growth investments.

By doing this, my goal is to get some long-lasting benefit from my gains, when I make them, but still to increase my float for generating further capital gains.

Does it work?

So far, I am happy with the performance of my retirement ISA. My eventual plan is to place all of the money in my HYP shares, which will leave me with a largely passive and tax-free income to enjoy in my retirement.

Of course, I defy anyone to see that far into the future -- but at least I've got a plan that I reckon will deliver me results as good as the average personal pension, without any fees and with the chance of doing much better.

Remember -- if you're not sure how to get started with your own retirement portfolio, then take a look at this free report from the Fool, "10 Steps To Making A Million In The Market" -- it's completely free and well worth a read.

If you've got an opinion (and you probably have), then feel free to leave a comment below!

He avoided techs in the dotcom bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".

Further investment opportunities:

> Roland owns shares in Royal Dutch Shell, HSBC, Aviva, Vodafone, GlaxoSmithKline and Unilever. 

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

JustWannaBuy 11 Jun 2012 , 2:25pm

Got to say Roland this reflects my position as well. Got a 7 year pension from a permi job (frozen) and have been contracting for the last 6 years. I have a stocks and shares ISA (decided against a SIPP for the same reasons you quote above) which I intend to max each year over the next 25 years (plus reinvested divs) and then to hopefully have a lump sum from the limited company I operate at retirement. Not sure what I'll do with this lump sum but gives me options at retirement.

Hope both our plans work out.

QuantumDealer 11 Jun 2012 , 2:56pm

...if you are relying on "hope" for this 'plan' to work then I am afraid your plan has failed already.

JustWannaBuy 11 Jun 2012 , 6:47pm

Oh well... Please do bestow your wisdom on full proof 'plan' oh wise one

KSB123456 11 Jun 2012 , 7:37pm

I'm also building a HYP but aiming for 20 diversified shares and in addition a personal pension.

goodlifer 11 Jun 2012 , 8:33pm

"I invest the ... minority of my portfolio in a small number of value or growth shares that I hope will deliver capital gains over the medium term."

If I were to try that game I' know I'd find myself breaking Warren Buffet's Rule Number Two.
Wish you luck on that one.

Otherwise I'm with you all the way.

eyeball08 11 Jun 2012 , 8:47pm

"Quantum dealer" is probably one of the wise who relies on big fees from people not taking control themselves. Maybe the clue was in the name.

max22222 11 Jun 2012 , 9:12pm

I stopped paying into a personal pension at age 36 when the government destroyed pensions credability by retrospectively increasing the earliest retirement age. Pension rules are at the mercy of unscrupulous politicians, therefore pensions cannot be trusted.

goodlifer 11 Jun 2012 , 9:39pm

"Pension rules are at the mercy of unscrupulous politicians."

And of the pensions industry.
They can't be trusted either.

ANuvver 12 Jun 2012 , 2:21am

Easy, lads, easy.

The Motley Fool shine is on this, to be sure, but the basic point is about taking charge of your own future.

I look at my income pf and don't honestly think I'm doing very much different from most financial product providers, but at least I'm effectively paying myself the management fee.

BFTB 12 Jun 2012 , 8:39am

Yep, i do pretty much exactly the same. Recently got a note from my sipp provider to say how much they estimated i'd retire on if i never put another penny in which was reassuring.

Hannibalis 12 Jun 2012 , 6:34pm

I wouldn't discout pensions completely. The tax benefits of pensions mean they are a no-brainer for any income taxed @ 40%. You can also put money (up to a limit) into a SIPP for a (non-working) spouse or kids and get the govt to pay 25% on top. Also, if you do your sums and make sure you pension payout is within your future income tax allowance you win (on tax) at both ends (in and out).

I would also 'stabilise' the share HYP with some high yield bonds/preference shares/PIBS.

jessemax 13 Jun 2012 , 3:43pm

I would discount pensions completely. By the time I was 40, I had prudently amassed £55k in my Equitable "Pension", it is now worthless. I received fair and just compensation from this government of £128 last month. I live and work in Bristol, I only have to look at the AXA and Hargreaves Lansdowne Headquarters in the City to understand where your investment really goes. To think the government or the pensions industries are going to give you anything other than the bare minimum from your lifelong investment is Very Foooooolish indeed

Kingfisher55 13 Jun 2012 , 3:58pm

Nobody ever mentions the impact of a divorce on pensions. As you move through your 40's into your early 50's if you are unfortunate enough to find yourself in this position you probably don't have enough time left to recover financialy.....any thoughts?

taken2often 13 Jun 2012 , 5:05pm

Just Wanna Buy.
Do you own the limited company. If so you can sell shares back to the company and take the capital gains allowance each year, instead of a taxable lump sum.

The writers ISA plan is ok if he only contributes 100/120k into it over a long period then giving up the tax free input allowance makes sense. Otherwise a SIPP may be better. Or both even better.

He is also ignoring Inheritance Tax should he die early

ISA have more chance of disappearing overnight than a pension.


andya14 13 Jun 2012 , 5:16pm

I agree with not depending totally on a pension for the reasons given but I like to have eggs in different baskets so have a pension and also invest regularly in an ISA.

Is it a bit risky though having a portfolio of shares that are never planned to sell. Could end up with another Northen Rock, RBS, Marconi, etc.etc.?

My long term ISA is a tracker for FTSE all share which hopefully will minimise future risk of "negative black swans" and keep fees down to a minimum.

SpiderMag 13 Jun 2012 , 5:19pm

Self reliance is rthe key i have aprox 150k in company pensions so dont want all my eggs in one basket. My partner has a final salary option and i have a 50k redundancy payment. Iwe have invested 20k bwtween us in cash isa and plan to max out stocks and cash isas any time we can. Low interest mortgage tops it off. Just trying to be flexible so that we can pay mortgage off when it makes sense. All this can account for nothing if you are unfortunate with your health.

Essexwader 13 Jun 2012 , 5:58pm

I'm fortunate that I retired in 1989 with a company pension albeit not index linked like some at that time. Took max cash from pension which did not compromise my wife's pension on my death.
Had another employment for 6 years as a result of a secondment, used max pension contributions into Equitable Life , got out before the big crash.
Now have 80K in ISA Investment trusts plus 30K in highest interest paying accounts I can find.
Income is well above average from my pensions and those of my wife.
Count myself lucky that I was a pre WWII child.

gmg1950 13 Jun 2012 , 6:52pm

I have used pensions, property, ISA's and individual shares in preparation for retiring later this year. Do you think ISA's will still be around in their present form or similar when you retire? I still cringe when I think of the damage Gordon Brown has done to my pension. Spread the risk and keep at least some personal control.

moreuseless 13 Jun 2012 , 7:16pm

I favour the ISA route over pension only because I can't get my hands on the pension lump sum (apart from 25%). Whether it is in a SIPP or final salary or whatever the basic stumbling block for me is the fact that I will no longer own the capital. In an ISA (or whatever takes its place) I own the capital. Therefore I can decide whether to pay myself a large sum or a small sum each year. This flexibility is far more important than getting a fixed income each year!

Just for Goodlifer - sorry but I agree with you again!

backdated 13 Jun 2012 , 7:22pm

Assume dividend yield a rather generous 5% p a.

Tax credit recovery was 1% of the pot every 12 months.

Same with Equity PEP's/ ISA's.

Big deal?

Gordon Brown didn't do much to help investors but didn't have that much effect upon people's pots.

We can't blame him if we haven't got enough to retire on.

The cult of Equity and The Financial Service Industry however do have the propensity to mislead. Bid and offer spreads on shares are massive and do have a disproportionate (yet largely silent because The City likes it that way) effect upon retirement strategies.

Xrat 13 Jun 2012 , 7:51pm

Your country needs YOU!
(Do your bit for 'Good old blighty' save in an ISA)

I used to think of my earnings as something the Chancellor was entitled to dip into before I got my cut. After being fleeced royally, I have changed my attitude. Now I see it as war! It's my money and I'm going to fight tooth and nail to keep it.
Put it in an ISA and the Chancellor gets his up front, you pay tax first. In a pension you get the full benefit of interest on ALL of YOUR money.

The Chancellor kindly invites me to pay 40% tax each year, alternatively I can put it in a SIPP until I retire into the 20% tax band. Fortunately I already have a pension that pays the magic £20K per annum, which means I can draw down as much as I like from my SIPP. My intention is to draw the maximum each year whilst staying (just) within the 20% band.
From the SIPP I can draw 25% of the total as a tax free lump sum afterwhich I will only be paying 20% tax on the remaining 75%. This averages out at 15%...., instead of the original 40% had I invested in an ISA.
Meanwhile, because my household income has been depleted through pension contributions, my family become entitled to some of the benefits that my taxes pay for, which would otherwise be reserved for those who have no intention of working!
I can only estimate that including benefits into the calculation, my tax rate drops from 40% to about 5%.
Please visit the HMRC website, it's difficult to believe that by saving into a pension you can become able to claim, but in this case believe me the old adage, "If it looks too good to be true..," is not accurate.
It's your money, stop fooling around with it. Fight for it!!!
Of course if you still want to save into an ISA make sure you don't loose your job, because you'll have to live off your ISA.
YOU won't be entitled to the benefits your extra tax is so kindly paying for. Whilst in a pension it remains inviolable!

goodlifer 14 Jun 2012 , 1:13am

Thanks moreuseless,
Nice to know I'm not, for once, in a minority of one.

cynical1000 14 Jun 2012 , 11:19am

Relying on an Isa portfolio for pensions is fine unless a cash strapped incoming government spots a soft target for revenue raising . A think tank called the Social Market Foundation has recently published a paper suggesting how the goverment could raise £20 billion to be spent on infrastructure. Along with halving higher rate tax relief on pension contributions the other major suggestion is capping maximumum ISA holdings at £15000. While I doubt whether any incoming administration would risk the backlash of this low a level I can well imagine a Labour or Lab/Lib goverment capping it at £50000 or £100,000

LeedsChris 14 Jun 2012 , 11:26am

Why are so many people so negative? I am sure no-one would advocate only relying on one single asset (pension or ISA or property or gold, or whatever) as a guaranteed route to prosperity in retirement. But it appears to me that the SIPP route is absolutely worth pursuing as part of a portfolio for old age. The Treasure actually 'gives' you money, even if, like me, you are already retired! I put in some money and even for me the Treasury adds 25% to it - not a bad increase in an asset for no work! For those who are still working, and particularly if you are a high rate tax payer surely it is a 'no brainer' to put some money in a SIPP given the amount the Treasury contributes to it...

RomfordDOC 14 Jun 2012 , 2:52pm

That is a good tip taken2often, I shall be having words with the useless lump that comes in once a year to do my books. Another one for the SIPP route is if your company pays a sum direct to it thus avoiding both tax and that other tax called NI.

As LeedsChris says, don't stick to one route as it usually leads to disappointment.

eccyman 14 Jun 2012 , 6:22pm

My pensions got four legs

- Occupational pension
- Property via BTL

Costs are horrendous, over £2,000 per month. But I do sleep easy at night.

licoricel 14 Jun 2012 , 10:04pm

RomfordDOC: Hopefully your useless lump will point out that for your company purchase of own shares to qualify for capital treatment, amongst other things, the purchase must benefit the trade of the company and leave you unconnected (<30% shareholding) with your company.

thairet 14 Jun 2012 , 10:33pm


How are you incurring such a high cost…is that £2000 pm a typo?

RomfordDOC 15 Jun 2012 , 8:44am

A good lesson in not being too quick to judge without knowing all the facts licoricel and one I momentarily forgot, the unfairly christened 'useless lump' would have been privy to that information and may explain his silence.

A useful tip nonetheless and something I'll explore further.

eccyman 15 Jun 2012 , 1:28pm


No, not a typo. I really do put £2,000 a month away

Occupational pension costs me £200 a month (employer much more!)

I get property income of around a £800 pcm - this gets fed into a SIPP, but once I retire will go into my own hands.

I put about £600 a month into an ISA.

About £400 a month goes into regular IT savings plans (F&C, TEMIT etc)

Income is quite high and outgoings low (eg mortgage paid) but still have to make sacrifices to save so much. But have got used to it now..

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