Tuesday 18 June 2013

Sipp Drawdown Review - First Year

An article on RIT earlier this week on pension income drawdown rates prompted me to review the performance of my sipp drawdown which is just approaching its first anniversary having converted my SIPP into income drawdown in June last year.

Whilst researching material for my ebook “DIY Pensions”, I looked at the various scenarios to provide me with the best long-term income from my sipp which had been many years in the build phase. The annuity rates on offer in 2012 were, in my opinion, derisory and therefore it was not a difficult decision to convert to income drawdown.

During the early part of last year I started to sell some of my shares - N.Brown, Dialight, Shell Oil, BSkyB, Reckitt, Lamprell and Vodafone - to build the cash fund for the 25% tax-free lump sum. The intention was to repurchase these shares with the lump sum in my ISA (so far only BSkyB, Dialight  and Reckitt have been repurchased).

I subsequently sold the remaining shares and replaced them with a few more investment trusts - Invesco Income, Aberdeen Asian and Murray Income. Given the predictability of income from investment trusts, these would be an ideal vehicle to generate the income I would need for drawdown.

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

SIPP Drawdown Portfolio - June 2013
(click to enlarge)

Including income, the total return for the 12 months is over 20% which is obviously pleasing. The market generally has performed well over this period - at the start, the FTSE 100 was 5,570.

I plan to maintain a rough split of 60% equities to generate a rising income which should keep pace with inflation. In this regard, the drawdown sipp is an index-linked annuity substitute.

The starting drawdown amount was limited under the GAD rules to just under 5% of the initial capital amount of £62,000 - i.e. £3,080. My plan was to withdraw less than the max. to start off and gradually build up a reserve. Once the reserve reaches 6 months equivalent drawdown, which may take another couple of years, I will then be looking to increase the drawdown to take out the maximum allowed under the rules. I would not however withdraw at a level which was unsustainable over the long term - I imagine around 5% p.a. should work.

Fortunately the GAD rules have recently been relaxed to allow the drawdown limit increase from 100% to 120% so this will provide some flexibility..

One obvious area to address is the overweight holding of Coventry BS PIBS. At some point this year the intention is to diversify into a wider range of higher yielding fixed interest securities.

Apart from this, I am happy with my first year of self-managing a drawdown sipp portfolio. I will make a note to update next June.


  1. "My plan was to withdraw less than the max to start off and gradually build up a reserve." Might I suggest that you consider drawing the max and putting any surplus income into a new SIPP (for self or spouse)?

    1. Thanks, but I feel comfortable with my current arrangements.

    2. As I understand it, dearime's suggestion has certain tax benefits - you get immediate tax relief (a 25% boost) and the inheritance tax implications of a pension being contributed into are much better than those of a pension in drawdown.

      Apologies if you've already considered this and ruled it out. And as you say yourself, DYOR anyway.

  2. Thanks for sharing John. You must be happy with a 20% return.

    Could it be worth removing the maximum GAD amount and reinvesting the difference into you ISA? (Unless of course you are already maximising your ISA contributions.) Removes some of the risk of the government changing the pension rules to your detriment.


  3. Hello RIT,

    Of course, you can never rule out the government moving the goalposts when it suits them, however I think there's a lot to be said for sticking to the original plan if its working.

    Also, who's to say the government would not change the ISA rules!

  4. I like that you can draw from income, not by selling down capital. This is exactly what I'd look to do in your scenario.

    I don't care what any theorist says, really -- I'm certain this will have less deleterious impacts then if a retiree has to make selling decisions to harvest income from capital...