Friday, 19 June 2015

SIPP Drawdown Review - End Yr 3

I decided to convert my SIPP into pension drawdown in June 2012. Its hard to believe that three years have now passed and its time for another annual update.

The plan is to maintain a rough split of 60% equities from which to generate a rising income which should hopefully keep pace with inflation. This element of my portfolio is comprised of a ‘basket’ of investment trusts. All trusts have managed above inflation dividend increases over the three years. In this regard, the drawdown sipp is an index-linked annuity substitute.

The non-equity part of the portfolio consists of the New City High Yield trust and a rather large dollop of PIBS from Coventry BS which is due to mature next June.

At this point last year, the total return for the portfolio was 32.6% which meant that over just two very good years, the value of the portfolio had grown to its original starting valuation prior to taking the 25% tax-free lump sum payment.

Over the past year, the returns have been more mixed and the performance of some of the investment trusts have been more muted as share price premiums have reduced. Once again there have been no changes to the portfolio. As readers of my blog will know, this is a big contrast to my individual shares portfolio!

Performance

As can be seen from the end column, I have calculated the 3 yr average annualised return (including income) for each of my investments. Sometimes it can be a little misleading focussing on the income yield alone whereas what really matters over the longer term is total return - capital appreciation + income combined.

My holding in smaller companies specialist Aberforth continues to perform well with an average return of over 29% p.a. in each of the past three years. The larger trusts, Edinburgh and City of London have been very solid however I have been a little disappointed with a few of my Aberdeen stabled ITs over the past couple of years - the two Murrays, and Aberdeen Asia Income.

The total return including income after 3 years is 43.8% which is very satisfactory.

Here is the portfolio (not actual amounts but roughly reflecting weighting for each holding)

SIPP Portfolio to June 2015
(click to enlarge)

In recent months, I have reviewed my investing strategy and have been moving more towards passive index funds with my ISA - I thought I would just compare how my pension may have performed over the past 3 yrs using say Vanguard LifeStrategy 60 which would reflect the equity percentage for my current sipp portfolio.

Over the past 3 years, the average annualised returns (adjusted for platform fees of 0.20%) for the Vanguard fund have been ~10.5% p.a. Assuming I sold some of units at the end of each year to provide an equivalent income, my starting sum of £62,000 would now be worth ~£74,000 had I adopted this route to manage my sipp drawdown.

Obviously, the investment trusts have delivered a steadily rising income stream which means I do not need to touch the capital. The overall CAGR after 3 years is 12.9%p.a. - without the boost from smaller companies specialist Aberforth, I suspect this figure would be nearer to the 10% offered by the LifeStrategy 60 fund.

Income

The aim of the sipp drawdown is to generate a steadily rising income from my investments to keep pace with inflation.

In each year the dividends generated have seen a modest increase - the current return is around 4.6%. In the first two years I withdrew around 20% less than the natural yield in order to build a cash buffer. In the past year I have increased the drawdown amount from £2,800 to £3,250 which represents just over 4% leaving a little more to increase the buffer.

Under the new freedoms, I am now able to drawdown as much or as little as required. As my pension is my main source of taxable income, I could withdraw £10,600 tax free this year - this option is currently under consideration.

Pension Changes

As we all know, there was quite a radical shake-up of pensions announced by the Chancellor in his 2014 Budget. Here’s a link to my post shortly afterwards and a more recent article in March.

These changes took effect from April 2015. I have now converted my pension from income drawdown to flexi drawdown which basically means I am now free to take ad hoc payments from my pension for whatever sum I decide as and when needed. I am considering a house move later this year (yes, I know, it‘s only a year since the last move!) and it could be a possibility to use some of my pension towards this although I have decided against the Lamborghini this year.

I am reasonably happy with my first three years of self-managing a drawdown sipp portfolio. The dividend income has predictably rolled in very much as expected and importantly, increased each year a little ahead of inflation. I am pleased the overall result after the first three years which have been a little better than I could have achieved with a simple low cost approach using Vanguard Lifestrategy funds.

I will need to give some thought as to where to reinvest the redemption of the Coventry BS PIBS next year but for the time being, I am minded to leave the portfolio to take care of itself - as they say, if it ain’t broke….

I like June!


11 comments:

  1. Hi John

    Sounds like the SIPP is performing well. It's also doing what I'd like my total portfolio to do once I start to drawdown. That is the dividends/interest spun off exceed my income requirements which then allows a bit of reinvestment and/or a bit of a dividend buffer should a bear rear it's head.

    Cheers
    RIT

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    1. RIT,

      Thanks for stopping by. Yes, no surprises so far but the markets have been mostly on the up since I moved into drawdown and bears have been keeping a low profile.

      My original plan was to build a cash buffer of a year or so income requirements and then withdraw the natural income of around 4%. With pensions, all the drawdown is taxable so I may well make use of the new rules and use my tax allowance and put some of the excess into my ISA before the state pension kicks in at age 65 yrs. Its good to have the additional options.

      I am looking forward to seeing how your early retirement plans work out - possibly starting next year?

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    2. "...possibly starting next year?" Mr Market hasn't been so kind to me since early April. I'll role up all the numbers for a H1 '15 post but right now I'm crudely back to a market total return of only around 1% or so YTD. This has put me a little behind but if Mr Market returns to average performance I'm certainly on for a Christmas 2016 retirement. I'd still only be 43 years of age and would have still achieved the goal in less than 10 years so it's not all bad news.

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    3. I am sure you will be there soon..after all, the more significant factor is the saving hard rather than the investment returns. Good luck with the 'final lap'..!

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    4. Savings out contributing investment return really has been one of the surprise packages of my investment strategy so far. I am pretty good at planning and it's just something I never really spotted or predicted.

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  2. Sounds like a solid performance so far, John.

    The new changes seem very favourable for you as well which is encouraging. Certainly gives you plenty of other options to ponder. Will be interesting to see what course of action you look to take in the future!

    Good luck with the potential housing move later this year! It sounds like your quite the peripatetic!

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    1. DD,

      Thanks - solid would be a good description of progress to-date. Peripatetic would be a great description of recent years trying to find a quiet, peaceful corner to settle - so far, seems to be a little elusive but will keep trying!

      BTW, thanks for the mention (x2) in your weekend round-up.

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  3. I love June too - all that lush, healthy growth and honey-producing blooms. Just like your SIPP. :-)

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    1. A good analogy Cerridwen. I guess the bees will be at their busiest right now building up their store for the Winter months. I am sure there are many lessons we could learn from observing nature!

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  4. Thanks for the comparison to the Lifestrategy fund. Was just thinking how it would match up as I read and then boom, my wish was granted. That fund gets my vote in retirement. BTW

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    1. MRF,

      Thanks for stopping by. The Vanguard LS fund plays a central role in my latest book 'DIY Simple Investing'. I am sure it would make a great strategy for the build phase as well as a possibility for the drawdown/benefits phase.

      Good luck with your new blog!

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