Tuesday, 18 June 2019

SIPP Drawdown - Year 7 Update

Wild Honeysuckle (Clunton, Shropshire)
It's June, another 12 months has rolled by so it must be time to review my SIPP drawdown portfolio at the end of its seventh anniversary. Here’s a link to the previous update of June 2018.

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. This would bridge the 10 year gap between early retirement at age 55 yrs and state pension.

Last year my state pension kicked in so I am no longer reliant on income from my SIPP which means I have more flexibility on investment choices.

Portfolio Changes

My efforts to move towards a more climate-friendly portfolio are well documented and this includes my drawdown portfolio so there have been a quite few changes over the past 12 months. My main considerations are to avoid fossil fuel companies - and therefore the sale of Vanguard LS 60 (high weighting to FTSE), City of London, Aberforth Smaller and Edinburgh - and also to support renewable energy and other environmentally friendly funds which are more aligned with my values. Hence the introduction of Bluefield Solar, TRIG, iShares Clean Energy ETF and also Vanguard SRI Global.


I am currently mulling over the sale of Scottish Mortgage Trust as I see from the latest annual report that it has recently acquired a holding in Elon Musk's SpaceX.

As I no longer need to take an income from my SIPP, I can now dispense with the cash buffer of around £4,000 or 10% of the Vanguard fund and this has now been fully invested.

Performance

So far this year the markets appear to brush aside the political uncertainty of Brexit and the tensions arising from trade wars between USA and China <cue market correction>. There was a brief dip in the FTSE below 7,000 in December/January followed by a quick rebound but this is nothing more than normal market volatility. Over the 12 months, the FTSE 100 has seen a modest decline of 2.5% from 7,631 to currently 7,443...but maybe a gain of 1.5% total return including dividends. My SIPP portfolio is now more fully invested and it is pleasing to see a modest gain of 4.4% over the year. This includes all transaction costs resulting from portfolio churn.

With so many sales/purchases, it's difficult to compare the years performance for individual elements however HSBC Global Strategy Balanced made a gain of 5.0%, Vanguard LS 40 a gain of 5.7% and Capital Gearing a gain of 6.7% including dividends.


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 7,443 - a gain of 35%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 62%

When I started my drawdown in June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £191 - a gain of 82% or annualised average of 8.9% p.a.

Taking account of the income withdrawn over the past 7 years of £19,400, the total return including income is 84.7% which is very satisfactory and works out at an average annualised return of 9.2% p.a.



State Pension

For most of the past decade 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'.

My state pension has now been in payment for just over a year which is long enough for me to know that I do not need to continue with drawdown from my SIPP...although I can always dip in at any time for a lump sum withdrawal if required. 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.

Conclusion

Obviously I am reasonably happy with my first few years of self-managing a flexi-drawdown sipp portfolio. For the first few years, the dividend income predictably rolled in much as planned and importantly, increased each year a little ahead of inflation. During the next 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 now need little or no income from my SIPP in the future and will therefore focus on longer term growth combined with environmentally responsible options. As I am no longer depleting the capital, this should hopefully grow much the same as during the accumulation phase before drawdown and in the knowledge the pot can be inherited by children and grandchildren possibly tax-free at some point in the future.

For me, the big advantage of the SIPP is the flexibility it offers. I started off with a portfolio of income-generating investment trusts and PIBS. I then introduced the multi-asset, globally diverse index funds such as Lifestrategy and now I can sell the funds which are not required and replace with more climate-friendly options to satisfy my desire to do my bit for the environment. I can also withdraw as much or as little cash as needed.

What's not to like!

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

6 comments:

  1. Graham Pountain19 June 2019 at 14:59

    Hi, Once again thank you for your useful insights I find them both interesting and helpful.
    I thought I understood the rules regarding death before age 75 and after but after clicking on the link you provide for AJBELL and their example I wonder if I have misunderstood the rules.
    In their example they say that grandchildren (4 of them aged between 9yrs and 20yrs) are able to draw-down income of £11,850 per year tax free. I believe this is the tax free allowance available to everyone and assume they have no other income.
    However I thought that the transfer of the sipp became a sipp for the beneficiaries and that they would not therefore be able to take draw-down until they reached pensionable age. I would have contacted AJBELL directly but could not find their email but also assumed you would have the answer anyway.
    Kind regards,
    Graham Pountain

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    Replies
    1. Thanks Graham,

      If you have a SIPP then I would contact your provider for a definitive answer. But as I understand the position on death after the age of 75, my beneficiaries can take the remaining pot in my SIPP as a lump sum or as ongoing income. Either way the sum(s) taken will be taxed as income at the beneficiaries marginal rate. So my grandchildren could take out up to £12,500 p.a each tax free if they are non-taxpayers.

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    2. Thanks for your reply. Two issues I didn't understand which have been cleared up by the answer I found copied below. I think from what I have read that upon death the inherited pension fund (whatever percentage it is of the original) can stay in a pension fund (as shares etc.) and can continue to grow free of capital gains tax etc and it can be drawndown by the inheritor whatever their age. The tax implications depend of the age of death of the original pesioner.
      Copy answer I found useful printed below:

      Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
      https://www.ft.com/content/2c931b84-c720-11e4-9e34-00144feab7de

      I have questions about inheriting a drawdown pension. Does the beneficiary have to wait until age 55, or does he or she just inherit the drawdown pot and have the ability to take taxed income from it immediately?

      Also, does an inherited drawdown pot count towards the beneficiary’s own lifetime allowance? If it does, is inheriting a pot a benefit crystallisation event or will the lifetime allowance only be assessed at their 75th birthday?

      If it’s the latter, surely a lucky beneficiary could inherit multiple pension pots with the tax privileges of a pension but no cap on their total value?


      Jamie Jenkins
      Jamie Jenkins, head of pensions strategy at Standard Life says: There has been an important change recently as to who can inherit a pension pot on someone’s death, and keep it inside the pension wrapper. The new rules from April 6, allow any nominated individual to do this.

      The beneficiary is not required to wait until age 55 to dip into their inherited pension pot. He or she can do so at any age using the new flexibility to draw as much or as little as they choose. If the person they inherited it from died before the age of 75, it can be taken tax free. Death after 75 would result in income tax being paid by the beneficiary on amounts withdrawn.

      The inherited pension pot will not count towards the beneficiary’s own pension lifetime allowance. This means existing pension savings are unaffected by the inherited pension. Once a beneficiary inherits a pension pot, they can put their own nomination in place, setting out who they want to benefit on their subsequent death, allowing the pot to be cascaded down the generations inside the pension tax wrapper. The beneficiary’s age at death is all that determines how much income tax the next generation will pay.

      However, if individuals want these new freedoms, they must ensure their savings are in a modern, flexible defined contribution pension that allows them. Many pensions have been around for years — designed with a very different retirement journey in mind and may not offer the new options. Therefore it will be necessary to consider transferring existing pensions to more modern ones which are fully flexible.

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  2. It's good to see a worked out example of a SIPP drawdown and you've done really well over the years (a rising tide lifts all SIPPs and all that).

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    Replies
    1. Thanks GFF. The markets have been relatively positive for most of the past 7 years so I imagine many investors would secure a decent return. For all my efforts in selecting the many funds over the period, the reality remains that I could have put the whole pot in the Vanguard LS 60 fund and received almost the same - possibly a little more with the VLS 80.

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  3. I enjoyed the sipp drawdown update. Interesting to see where I hope to be in 7 to 8 years time.

    Think been answered. But beneficiary doesn't have to wait. Can draw down straight away. Under 75 tax free lump sum. Over 75 flexi drawdown at marginal rate of tax. Lump sum in later case not good as could take into higher tax bands. Subject to future change in legislation. As it stands incentive to spend isa's first and leave pensions to beneficiaries if over the iht limit 325k.

    ReplyDelete