Thursday, 15 October 2015

SIPP Flexi-Drawdown Portfolio Changes

As we know, there was quite a radical shake-up of pensions announced by the Chancellor in his 2014 Budget.

These changes took effect from April 2015. I have completed the forms and 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.

Under these 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 can withdraw up to £10,600 tax free this year. As I have little taxable income, it appears to be a no-brainer to siphon off some of my taxable sipp over the coming few years and reinvest in my ISA as the income in the future will be tax free.

When I reviewed my sipp earlier in the year, I was a little surprised to note how favourably the Vanguard Lifestrategy60 fund would have compared over the corresponding 3 yr period since June 2012.

At the end of my 3 yr review period in June, 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 at the 3 years review point was 12.9%p.a. - without the boost from smaller companies specialist Aberforth, I suspect this figure would have been nearer to the 10% offered by the Lifestrategy 60 fund.

Portfolio Sales

This revised strategy to remove the value from my sipp up to my personal allowance each year was more or less the decision I reached following the announcement 18 months back. I have mulled over the decision in the intervening period and can see no real downside. My recent walking holiday break in Pembrokeshire gave me some quality time away to reflect on things and I came back with a settled decision to go ahead with this changes to my sipp.

The main consideration therefore was merely to decide which investments to sell.

In the end, I decided to dispose of some of the investment trusts which are duplicated in my ISA. Also, I wanted to keep the Aberforth smaller companies trust and also the more globally diversified Law Debenture trust.

I have therefore sold the following :

New City High Yield
Dunedin Income
Murray Income

As the LS index fund can provide the balance and diversity I need with lower costs and a comparable, if not better, returns than the investments sold, I have decided to stick with it moving forward rather than the investment trusts. It just seems very simple.

Although the proceeds will be withdrawn and then reinvested in the Vanguard LS outside of my sipp, for the purposes of maintaining continuity of a demonstration drawdown, I will retain the investment within the sipp. The proceeds are therefore shown to purchase 79.7 units in Vanguard LifeStrategy60 (acc).

The next drawdown decision will be next July following the anticipated redemption of my Coventry BS pibs which currently account for ~ 1/3rd of the portfolio value.

Here is an updated portfolio.
(click to enlarge)
As ever, slow & steady steps...

2 comments:

  1. Hi John

    Thanks for posting about this as it is something I have to consider as my FI day draws near.

    You say that you can take the value of your personal allowance tax free, but if you are on flexible drawdown is it not the case that 25% of the money paid is tax free, therefore you could take out more each year?

    Whatever is the case you will be able to take more next year as the tax free allowance is increasing anyway, and the government aim is to get the allowance to £12,500.

    Best Wishes
    FI UK

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    Replies
    1. FI,

      Thanks for dropping by - good to hear from you.

      When I converted to income drawdown in 2012, I withdrew the 25% tax free lump sum on the whole pot therefore all subsequent drawdown of income is taxable.

      I believe the personal allowance will be increased to £10,800 from next April so I should be able to withdraw up to this sum from my flexi drawdown pot in the coming tax year and increasing amounts in subsequent years.

      The changes have been a welcome bonus and mean I have received tax breaks on all the years of paying in and will pay little or no tax on the benefits withdrawn.

      Good luck with your run up to early retirement!

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