Tuesday, 20 June 2017

SIPP Drawdown Update - 5th Anniversary

It's  June, another 12 months has rolled by and time to review my SIPP drawdown portfolio at the end of its fifth anniversary. Here’s a link to the previous update of 2016.

The original plan was to generate a rising natural income from which I would withdraw 4% which I calculated should be sustainable over the longer term without depleting the capital. This plan was revised following the introduction of pension freedoms in April 2015. The new strategy is to remove the value from my sipp up to my personal allowance each year - currently £11,500 - and surplus cash not required for income is transferred into my tax-free ISA.

Rather than focus on investments which can generate a natural income of at least 4%, I am moving the portfolio more towards lower cost, globally diverse index funds and a focus more on total return. Therefore the Vanguard Lifestrategy funds have replaced some of my investment trusts over the past two years

Portfolio Changes

As a result of the revised strategy I have made a few changes. Last year I sold Dunedin Income, Murray Income Trust and New City High Yield and purchased Vanguard Lifestrategy 60 (acc) fund.

Over the past 12 months I have sold Murray International Trust, Aberdeen Asian, Invesco Income Growth and Law Debenture. My Coventry BS PIBS were redeemed last June and half the proceeds (£14,000) were used to purchase Vanguard Lifestrategy 40 (acc). In addition I have recently sold one third of Aberforth Smaller Cos. Trust and also City of London. The smaller companies trust has had a good run and returns over the past 5 years are well over 100%. Finally there was a speculative purchase and subsequent sale of two shares - Unilever and IG Group, which has helped to boost returns.

The other additions to my drawdown portfolio have been HICL Infrastructure, Tritax Big Box including a top-up following the recent rights issue, iShares Corp. Bond ETF and finally a holding in Scottish Mortgage Trust.


The value of the investment trust sales and Coventry PIBS redemption exceeds the value of purchases by £24,207. In addition there was a surplus from the previous year, also there are accumulated dividends over the past 12 months. As a result I am still holding quite a large percentage of cash for the time being and will await a recovery in sterling and a pull back in the markets before looking at reinvesting the cash.

In any event, I plan to hold a cash buffer of around £4,000 or 10% of Lifestrategy value which I can draw down for 'income' during bear market periods. I would not feel comfortable selling down units in my LS funds for income when their value was less than the previous year.

Performance

My report last year was just before the Brexit referendum and returns had been checked by the doom and gloom merchants warning of the dire consequences of Britain leaving. Of course, we did vote to leave but after a brief dip, the markets soon recovered and have surged ahead to reach new all-time highs over recent weeks. I expect some volatility until the outcome of exit negotiations becomes clearer.

Article 50 was eventually triggered in March followed by a snap general election earlier this month which was supposed to strengthen the position of the prime minister but it did not quite go according to plan and the Tories ended up losing seats and now hoping for a deal with the the DUP to cling on to power. This has weakened the governments negotiating position and there is a strong possibility of yet another change of leader and also yet another general election. Hardly the ideal backdrop to the start of Brexit negotiations with the EU over the coming couple of years. I am thinking the markets will take a dive if the talks end in deadlock but I think it will be in everyone's interest to reach a sensible agreement.

So far the markets appear to brush aside the political uncertainty. Over the 12 months, the FTSE 100 has risen 25% from ~6,000 to currently 7,524. My SIPP portfolio is now more defensively structured with a larger proportion of bonds and cash, however it is pleasing to see a gain of 16% over the year. The starting value in June 2012 was £62,000 and taking account of monies withdrawn, the portfolio is above £90,000 for the first time.

My holding in smaller companies specialist Aberforth has, once again put in a very strong performance and return of 35% over the past year - the average return remains high at over 20% p.a. over the past five years. At the start my smaller companies trust comprised just 6% of the portfolio but had increased to over 10% so I have trimmed the holding by selling 290 shares. City of London has also had a solid year with a return of ~20% and I have top-sliced with a sale of 1,010 shares.

The total return including income after 5 years is 50.6% (last year 43.1%) which is very satisfactory and works out at an average annualised return of 8.5% p.a.

Here is the portfolio

Sipp Portfolio to June 2017
(click to enlarge)

Comparisons

In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,520 - a gain of 36.7%. If we add in average dividends of say 3.7%, this gives a rough total return of 55%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £173 - a gain of 64.7% or annualised average of 10.5% p.a.

The overall annualised return of the SIPP portfolio after 5 years is 8.5% p.a.

Income

The original aim of the sipp drawdown was to generate and withdraw a steadily rising natural income from my investments trusts to keep pace with inflation.

Under the new 
pension freedoms which took effect from April 2015, I am no longer restricted by the GAD rules and I am now able to drawdown as much or as little as required. As my pension is my main source of taxable income, it makes sense to reduce the pot by transferring the capital tax free to my ISA. Over the past couple of years I have taken out £21,000 and I intend to withdraw a further £11,000 for the current tax year.

A big percentage of income in previous years came from my Coventry BS PIBS however these were redeemed last June and this will reduce the natural income by £1,700. Furthermore there is now less revenue from the income trusts which have been sold and replaced by my Lifestrategy funds - both accumulation versions.

I have relied upon my SIPP to supplement my ISA income and bridge the gap between early retirement and state pension. This part of the journey will become 'mission accomplished' next year. In 2018 my state pension will commence and I will be less reliant on the income from my SIPP for essential living costs and it will become more for discretionary spending. My recent forecast suggests I should receive a sate pension of ~£8,500 and as this is taxable, it will limit the tax free sums I can take from my SIPP to around £3,000. Any money withdrawn above this amount will be taxed at 20%.


I retired from paid employment at the age of 55 yrs and obviously at the start of the process there is some uncertainty on the big question of what is a sustainable level of income to draw down. My starting point was ~4.0% and so far this has been well within the level of growth generated by the portfolio over 5 years which gives me more confidence that this level of drawdown can continue longer term. The next question is whether, over the remaining period, I could increase the withdrawal to maybe 5%. Having been a saver all of my adult life and living well within my means, I find it quite a challenge to become a 'spender' now the funds are available!

I am reasonably happy with my first five years of self-managing a flexi-drawdown sipp portfolio. For the first 3 years, the dividend income has predictably rolled in much as planned and importantly, increased each year a little ahead of inflation. Now I am able to withdraw significant lump sums tax free and place the excess which I do not require for income in my ISA. Of course, there are no tax liabilities for all monies subsequently withdrawn from my ISA.

If you are managing your SIPP or you are planning to do this, feel free to share your experience in the comments below.

10 comments:

  1. Well done! A very positive report.

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  2. How do you withdraw money from your SIPP? I'm only a year away from 55 myself and find it endlessly confusing. Did you put the whole of your portfolio in draw down, take out the 25% tax free and just withdraw income now and then to stay within your personal allowance or do you withdraw it direct from the SIPP itself (when I understand 25% of each tranche is tax free)?

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    Replies
    1. Ruby,

      Yes, I converted all my pension pot to drawdown and then withdrew the 25% tax-free lump sum. In the early years my drawdown was restricted by the GAD rules which dictated the max. amount of drawdown - around 5% but now you can take as much as you require so its more like a savings account. All pension drawdown is taxable so it will depend what other taxable income you have.

      Here's a guide from AJ Bell which may help.
      https://www.youinvest.co.uk/pensions-and-retirement/accessing-your-pension/drawdown

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  3. As you have taken 25% of the pot tax free you can take £11,500 this tax year free of tax if no other taxable income - link below. I am thinking of taking payments of tax free allowance x 1.33 to maximise the tax free income each year rather than take the lump up front as it is not needed. Anyone any thoughts on this approach?

    https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past#personal-allowances

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    Replies
    1. I might be tempted to take enough TFLS to fill up ISAs every year until the TFLS is exhausted.

      Or perhaps that should be "to fill up ISAs, high interest current accounts and regular savers".

      This would be protection from legislation that might (i) reduce the TFLS from 25%, or tax it at some low rate, and (ii) that might reduce the permitted annual subscription to ISAs.

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  4. It doesn't really matter which way you take the tax free lump sum as things stand. However, if you take your route you might well find yourself paying tax on the amount over the tax free personal allowance due tot he idiosyncrasies of the way HMRC tax, depending on when in the tax year you take the money, and find yourself having to reclaim the tax paid.

    If you are not interested in the sustainability of your pot and assuming you have one of the normal size for most retirees, you will find yourself running out of funds fairly quickly.

    If the above does not apply and you want sustainability, then you need to look at a sustainable withdrawal rate

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    Replies
    1. Although dearieme does have a point about changes to legislation and I have always followed the principle if it is on offer from the government take it straight away as you never know nwhen things will change

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    2. I have no problem filling in a short form, sending it to HMRC after my annual withdrawal, and getting the tax refund within a couple of weeks. Not an issue.
      Further, don't assume you know my situation. I know what I'm doing thanks.

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  5. Hi DIY

    You asked for comments from people who are managing their SIPP. I have had a SIPP since March 2006, into which I also transferred in all my other money purchase arrangements that I had accumulated to bring everything together under one roof. During that time it was mostly in managed funds.
    From November 2013 having turned 56 and just before the Autumn statement I put my SIPP into Drawdown to ensure that I was able to take the 25% tax free cash and topped up my ISAs to generate a tax free income. Since then my investments have been in a mixture of managed funds, ITs and direct into shares. My strategy across all the vehicles is to invest for Dividends to generate an ability to withdraw 4% per annum without touching capital (Natural Withdrawal strategy), so that I will have a growing income over the years to fund a lifestyle that is comfortable.
    I retired from full time employment (predominantly consultancy& interim work since 2006) at the end of 2012, but have continued with the occasional consultancy and interim assignment, but by no means working on more than a part time basis.
    Since the beginning of 2014, I have withdrawn 13.65% of the original value as income from SIPP and ISAs and seen the investment value grow by 46.2%.
    So for me a natural withdrawal strategy is working and I still have some final salary pension schemes to kick in at the end of this year (albeit only about £7.k pa), but we look set to enjoy a comfortable retirement.

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    Replies
    1. Gareth,

      Thanks for sharing you approach to running your SIPP. I am always interested to see how others manage their investments...what works and what doesn't.

      A return of 46% in the past 3.5 yrs is clearly working for you and it looks like you could withdraw much more if needed. I guess its always good to know there is the works pension to come and later the state pension.

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