Tuesday, 19 June 2018

SIPP Drawdown - Year 6 Update

It's June, another 12 months have rolled by and time to review my SIPP drawdown portfolio at the end of its sixth anniversary. Here’s a link to the previous update of June 2017.

The original plan when I started drawdown in 2012 was to generate a rising natural income from which I would withdraw 4% income which I calculated should be sustainable over the longer term without depleting the capital. Three years later the plan was revised following the unexpected introduction of pension freedoms in April 2015.

I have also changed tack on how the income is generated. In the early years the plan was to focus on investment trusts and my Coventry BS PIBS which could generate a natural income of at least 4%. In the past couple of years my PIBS have been redeemed as expected and I have moved the portfolio to incorporate 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.

Portfolio Changes

Over the past 12 months I have used most of the surplus cash to make some additions to my portfolio. Last year I added TR Property which I also hold in my ISA. More recently I added HSBC Global Strategy Balanced which is very similar to my VLS funds and, looking towards capital preservation, I have added Capital Gearing.  Finally, I have topped up my Scottish Mortgage holding by taking advantage of a dip in the share price earlier this year. Although this global growth trust represents a modest percentage of my portfolio it has made quite a significant contribution to the value over the past 18 months with a share price rise of 60%.

I will be reviewing my strategy as the state pension has now kicked in but it is possible I will dispose of my Edinburgh IT in the coming year due to poor performance over the past couple of years. I may also dispose of the iShares Corporate Bond ETF as this area is adequately covered by my VLS & HSBC funds.

I will review also whether I still need to hold a cash buffer of around £4,000 or 10% of Lifestrategy value which could be drawn for 'income' during bear market periods. If I can get by on just the state pension if necessary then I am thinking the cash buffer is surplus to requirements. On the other hand, it is always useful to hold some cash in the mix to take advantage of opportunities which will arise during the next downturn and pick up a couple of bargains.

Performance

There has been a little more volatility in the markets over the past few months and I expect there will be more to come until the outcome of Brexit negotiations becomes clearer. We are currently looking at the imposition of tariffs by the US and a possible trade war involving China, Canada, Mexico and the EU. The whole of 2017 was fairly plain sailing but there are always events to spook the markets and volatility has to be accepted as a part of investing.


So far this year the markets appear to brush aside the political uncertainty <cue market correction>. There was a brief dip in the FTSE below 7,000 in March followed by a quick rebound. Over the 12 months, the FTSE 100 has seen a modest increase of 1.4% from 7,524 to currently 7,631...just over 5% including dividends. My SIPP portfolio is now more fully invested compared to June 2017 and whilst there has been some drag from holding cash, it is pleasing to see a modest gain of 5.3% over the year. Over the longer period, the starting value in June 2012 was £62,000 and taking account of monies withdrawn, the portfolio has risen above £100,000.

Returns have been mixed over the past year. Edinburgh -6% and HICL -10% have been the main underperformers. On the positive side are Scottish Mortgage +33% and Aberforth +13% and new addition TR Property +17%. My core holdings of Lifestrategy 60 & 40 have provided stability and an increase of £1,125 or 3.9% compared to 2017.


Here is the portfolio
(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 7,631 - a gain of 38.7%. If we add in average dividends of say 3.7%, this gives a rough total return of 61%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £181 - a gain of 72.3% or annualised average of 9.0% p.a.

Taking account of the income withdrawn over the past 6 years of £19,400, the total return including income is 77% which is very satisfactory and works out at an average annualised return of 10.0% 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 
pension freedom changes which took effect from April 2015, I am now able to drawdown as much or as little as required. As my pension was my main source of taxable income, it made sense to reduce the pot by transferring the capital tax free to my ISA on the basis that it would be taxed when my state pension started. Over the past three years I have taken out £32,000 tax free. Some of this has been needed for income (£10,350) and the rest has been invested in my ISA to generate more tax-free returns.

I realise I have not recorded drawdown income taken from the portfolio so will factor this into future reports. The first full year was a modest £2,800 after year 1 and this has gradually risen to £3,600 which is a 28% uplift over the 6 years.

(click to enlarge)
Many of the income trusts have been sold and my PIBS redeemed so there is now less natural income. Over the past year this income reduced from £2,075 to just £1,395. This has been withdrawn plus a further £2,205 from the cash surplus making a total of £3,600 for this past year - a small increase on the previous year.

State Pension

I have relied upon income from my SIPP to supplement my ISA income and bridge the 10 year gap between early retirement at age 55 yrs and state pension. This part of the journey is now 'mission accomplished' whoo hoo!

My state pension has just  commenced and I will therefore be less reliant on the income from my SIPP for essential living costs and it will become more for discretionary spending or more likely remain invested. Unlike an annuity which, once purchased means the capital lump sum is lost forever, any residue in my SIPP will pass on to my children and grandkids..tax free if I go before 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.

I will receive a state pension of £8,450 over the coming year and as this is taxable, it will limit the tax free sums I can take from my SIPP to around £3,400. Any pension money withdrawn above this amount will be taxed at 20%. I have now plugged the additional income including cost of living increases into my s/sheet for the next 10 years...a total of around £100,000 which will be very welcome indeed.


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 since commencing drawdown this has been well within the average level of growth of 9% or so generated by the portfolio over the past decade which gives me more confidence that this level of drawdown could continue longer term if needed. Which leads to the next point....

.....nope..not for me....

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 extra funds are available! I possibly no longer need the 4% income from my pension as living expenses are covered by the state pension. Frugal Freddie is unlikely to morph overnight into Lavish Larry...I have not so far been looking online for deals on a Caribbean Cruise or along to the showrooms looking at a new Lamborghini so I now need to review my investment plans and decide how to proceed from here on. I will probably post a little more on this when I get used to the new situation.

Obviously I am reasonably happy with my first few years of self-managing a flexi-drawdown sipp portfolio. For the first 3 years, the dividend income predictably rolled in much as planned and importantly, increased each year a little ahead of inflation. For the past three years I have withdrawn significant lump sums tax free and placed the excess which I did not require for income in my ISA. Of course, there are no tax liabilities for all monies subsequently withdrawn from my ISA. 
I will have less need for income from my SIPP in the future and will therefore slim down some of the income-focussed investments and look at some global growth and possibly one or two 'themed' investments.

So, all in all, happy days!

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

11 comments:

  1. Congratulations on 'mission accomplished' DIY! Very interesting following your draw down experiences. What a fantastic situation to be in to have some surplus cash and your concern is what to spend it on - that cruise must be beckoning! :-)

    The tax free cash you withdraw from your SIPP and put in your ISA - I'm assuming you invest this as you only have a £4k cash buffer? I'd wondered about that myself, whether I would invest the lump sum.

    Anyway, I'm going to bin EDIN very soon and will use the funds to finally invest in FGT, which is just on a low premium at the moment.

    ReplyDelete
    Replies
    1. Thanks weenie and no, I definitely have no desire to book a cruise. The thought of being cooped up with thousands of other people, the prospect of sea sickness and even norovirus hold no appeal whatsoever!

      Yes, the excess money withdrawn is invested in my Lifestrategy 60 & 40 funds and held in ISAs.

      Good luck with the Finsbury acquisition. I have held in my ISA for many years and have been very happy with performance so I hope it will continue to do well for you.

      Delete
  2. Congrats! It must feel very good to have set up a process and then it run so smoothly

    ReplyDelete
    Replies
    1. Thanks YFG however it help when the markets have been kind over the past decade (well mainly) so I would say luck has played a big part. I think if I had started out in say 2006 the drawdown story may have been different.

      Having said that, I held investments throughout the great financial storm of 2008/09 and was able to navigate a way through so I guess those experiences are a decent test of whether you are temperamentally suited to diy investing. We are all long term buy-and-hold investors when the markets are rising.

      Delete
  3. HI DIY

    A very interesting post, and hopefully my drawdown can follow yours in the fact that the SIPP has increased in value despite withdrawing cash each year.

    Just curious that you draw much less than your tax free allowance, I assume you have had taxable income elsewhere as if I didn't need the money to cover my spending, I would withdraw upto my tax free allowance and transfer into my ISA so tax is not a consideration now or if you have to leave your SIPP to your heirs when you are over 75.

    I will continue to follow your progress with interest
    FIUK

    ReplyDelete
    Replies
    1. Congratulations on commencement of your pension drawdown FIUK and I hope all goes well in the years to come.

      I think there may be some confusion...I have withdrawn the equivalent of my personal allowance over the past 3 years...£32,000 and from this I have taken out a total of £10,350 towards living costs and the balance has been invested in my ISAs.

      I hope you will continue with your regular updates as I am sure many will be interested on how drawdown works out in practice. I will certainly follow with interest.

      Delete
  4. Thanks for this, it is reassuring for us as a couple to read about someone already there as we plan towards my wife's early retirement (I am older than her and recently retired with a DB pension). My wife's current work scheme is a DC pot, and the plan is to switch that to a SIPP when she retires and withdraw the 25% tax free lump sum and then the personal income threshold each year until her various bits of DB pension start to come on stream. If it all works, by the time her state pension kicks in (age 67!) her entire DC fund will have been taken without having to pay tax.

    So in theory everything should be rosy. But what is less clear to us is how to invest a pot that will start as cash (the only way to transfer from the work scheme which doesn't have a drawdown option) when a large chunk of it will be withdrawn within 5 years. I see you are using Lifestrategy funds which is what we have in some current ISAs, but as short term investments they seem a bit of a gamble. So what to do? Money left as cash with any of the SIPP providers I have looked at offer no (or negligible) interest. Even pure bond funds would introduce volatility risk on short timescales. What would be ideal is the equivalent of Building Society fixed term cash accounts - maturing in 1,2,3 years as appropriate - but SIPPs don't offer that.

    You must have thought your way through this. When you started, what did you do with the money you would be withdrawing in the following couple of years, keep it as cash or put it in funds? Or do any of your readers have helpful ideas?

    ReplyDelete
    Replies
    1. Yes, an interesting issue you pose and my initial thoughts are to avoid investments for a period of 5 years as there is a possibility of capital loss.

      My own SIPP was in the build phase for some years before converting to drawdown and I merely continued to hold the same investments. So there was no lump sum to invest. Since moving to drawdown I have used a cash buffer for the past 3 years and a combination of investment trusts and Lifestrategy 60 and more recently 40.

      I have been fortunate that the markets have been largely positive since I retired. You decision may be made a little easier if there was a correction shortly after the cash was moved over to the SIPP!

      As you say, maybe other readers will have some helpful opinions on the best course...good luck with it.

      Delete
    2. Good of you to reply promptly. I appreciate the information gleaned from blogs like yours (particular mention for Monevator from where I followed the link to this post).

      It is frustrating that many occupational DC schemes don't have a drawdown option, otherwise my wife could plan based on longer holding periods. As it is her contributions are now going in to a cash fund since quite apart from the difficulty of a complete amateur succeeding with market timing, the timing of retirement has to take into account many other factors.

      (Actually there is timing we can usefully do without second guessing the markets: as long as she retires within the current tax year she can get the boost of investing from pre-tax income and then use her full 2019-20 threshold for withdrawal).

      But my hope that clever bloggers might have better ideas than leaving money in cash isn't realised! We will have to accept losing with respect to inflation as the pay-off for guaranteeing no decrease in cash value. The only thing I have been wondering about is a short duration bond fund as a 3-5 year investment, so I am keeping an eye on their movements.

      Delete