SIPP Drawdown - Year 8 Update

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 eighth anniversary. Here’s a link to the previous update of June 2019.

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.

In 2018 my state pension kicked in - currently £9,000 p.a. - I also have tax-free income from my ISA if required and 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 over the past 18 months and this naturally includes my drawdown portfolio so there have been a quite few changes. 

My main focus over the past year has been to move to fossil-free investments - and therefore the sale of the global multi-asset index funds which all hold significant percentages of the oil majors such as Exxon, Shell and BP as well as the big banks which finance their operations. I want my investments to support more sustainable solutions such as renewable energy and other environmentally friendly funds which are more aligned with my values.

It looks like the penny is starting to drop for the big oil companies. BP have scrapped their $75/barrel 30 year projection and will now work on $55, which I suspect is still overly optimistic. They have acknowledged that the pandemic will probably accelerate the pace of transition to a lower carbon economy. This excellent YouTube video by Carbon Tracker "You Can't Burn It All - A Tale of Two Investors" is well worth watching and a reminder of the growing risks of investing in fossil fuels.

Last year I introduced Bluefield Solar, TRIG, iShares Clean Energy ETF and this 'green' sector has expanded significanly over the past 12 months to include more renewable infrastructure trusts as well as a couple of stand alone company shares.

(click to enlarge)

The best (and luckiest) addition was ITM Power last August - the share price has really taken off in the past couple of months and is now worth 7x what I bought them for and this has given a significant boost to the portfolio value.

However, the sharp downturn in March reminded me to pay more attention to asset allocation and I have added some government bond ETFs to partly replace the bond element contained in the multi-asset Lifestrategy/HSBC holdings.

Performance

The big story dominating the news these past few months has been the coronavirus pandemic which started in China in January and quickly engulfed the whole world bringing it to a near shut-down. The markets took a sharp downturn in March but have recovered much of the lost ground over the past couple of months. I am expecting more volatility when the effects of the lockdown are fully realised and I think this may take some years to unravel and is likely to have far more impact on the global economy than I originally thought at the start.

Over the past 12 months, the FTSE 100 has seen a significant decline of 15.5% from 7,443 last June to currently 6,292. Following the sale of significant holdings in my global multi-asset funds last Autumn I was sitting on large cash proceeds for a while however my SIPP portfolio is now more fully invested and it is pleasing to see a gain of 33% over the year. Much of this is down to just a couple of individual shares - ITMPower adding £19,000 and Orsted adding £6,000.

I probably need to scale back my holding in ITM and diversify some of the gains into the wider 'green' market. One option would be Baillie Gifford Positive Change which I hold in my ISA and which will compliment the Trojan Ethical Fund. I probably should also increase the proportion of my government bond funds which currently account for just over 20% of the portfolio.

Here is the current portfolio

 

19th June 2020  (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 6,292 - a gain of just 14.4%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 45%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £199 - a gain of 89% or annualised average of 8.3% p.a.

Taking account of the income withdrawn over the past 8 years of £19,400, the total return including income is 135% which is very satisfactory and works out at an average annualised return of 11.3% 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 became 'mission accomplished' in 2018.

My state pension has now been in payment for just over two year which is long enough for me to know that I do not need to continue with drawdown from my SIPP. As it is a flexi-drawdown arrangement, 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 the age of 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.

Obviously I am really 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 if not needed for care home fees!

For me, the big advantage of the SIPP is the flexibility it offers. I started off with a portfolio of income-generating investment trusts. I then introduced the multi-asset, globally diverse index funds such as Lifestrategy and now I can focus on more climate-friendly options and do my bit for the planet. It certainly feels much better to have aligned my investments with my values and lifestyle and know I am no longer investing in fossil fuels which are continuing to add to global warming and undermine efforts to tackle the climate crisis.

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.