What are the benefits of using ETFs for an SMSF in the retirement phase?

There are a number of possible benefits to holding ETFs within an SMSF.

An SMSF in the retirement phase tends to have a higher allocation to defensive, income-producing assets. But fixed income investments such as bonds can be hard for retail investors to access directly – not to mention that it takes time and expertise to properly evaluate individual bonds.

However, fixed income ETFs can be bought and sold in a single trade on the ASX. They invest in a portfolio of bonds, providing exposure across a range of issuers and maturity dates. Similarly, exchange-traded products that invest in hybrids are another convenient, cost-effective way to gain exposure to that asset class, removing the need for an SMSF to select individual hybrids. Hybrids can offer attractive income returns for SMSFs – including franking credits – typically above that of cash and fixed-rate bonds, and with return volatility somewhere between that of bonds and shares.

In addition, equity income funds offer access to a portfolio of shares that aim to generate significant levels of income in the form of dividends. There are exchange-traded products that give exposure to shares, but which also employ strategies that aim to reduce volatility and/or manage risk.

Importantly, as ETFs are valued daily, the changes in market values of ETFs will be reflected in the SMSF’s investment asset values but not be counted toward individual members’ transfer balance caps.

What are some options for an SMSF in the retirement phase to invest in?

The types of funds that could be considered by an SMSF at the retirement phase include:

For SMSFs seeking to allocate some of their portfolio to growth assets, the following funds could be considered:

Alternatively, our ETF model portfolios – accessible through financial advisers and available on various platforms – are rebalanced on a regular basis in accordance with different risk profiles and investment objectives.

What might a diversified portfolio look like for an SMSF in the retirement phase?

There are no hard and fast rules about the proportion of growth versus defensive assets an SMSF should allocate to. Generally, the bulk of the investment portfolio tends to be allocated to fixed income investments, hybrids and shares that pay meaningful dividends or a steady flow of income. However, to mitigate the effects of inflation and ensure that members don’t outlive their nest eggs, an allocation to growth assets may also need to be conisdered as part of the broader investment strategy.

It is important to note that in the retirement phase, there is a limit on how much you can transfer into a tax-free retirement account and that any excess above that cap generally needs to be kept in the accumulation phase, which is taxed at a rate of 15%. Depending on how the assets are split, you should consider adjusting your SMSF investment strategy accordingly.

As always, personal circumstances vary and may have an impact on your financial objectives and risk tolerance over time. This information should not be relied on as tax advice and you should obtain professional tax and financial advice before making an investment decision.

Where can I get information for my ECPI?

As fees for ETFs are taken out within the fund, there is no separate fee charged to your SMSF. This could help simplify the calculation of fees relating to the derivation of exempt current pension income (ECPI). The income earned from ETFs are provided on annual tax statements sent to SMSFs.

Do I need to rebalance? Or can I ‘set and forget’?

In the pension phase, an SMSF trustee needs to formulate, regularly review, and implement a retirement income strategy that assists members with meeting their retirement income objectives.

To ensure your SMSF holdings remain within your target asset allocation for your investment strategy, it’s important to monitor and rebalance your portfolio from time to time. For example, if shares have had an especially strong year, they may now represent a higher proportion of your portfolio than you would like. To ensure you have a sufficient allocation to defensive investments, you might consider reducing your exposure to shares and redirecting those funds to income-focused ETFs, in line with your SMSF investment strategy.

If your exposure to shares is in the form of a few ETFs or other exchange-traded products, this adjustment is easy to make – requiring only a small number of transactions. Compare this with holding multiple individual shares directly, which could require many transactions if each holding is to be reduced proportionally.