Pension phase SMSFs favouring domestic shares, avoiding property

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SMSFs in pension phase allocate more of their assets to domestic shares than funds in accumulation phase, while having less invested in property, new research has found.

SMSFs in pension phase have a stereotype of being more conservative and driven by yield. The latest Class SMSF Benchmark Report has analysed the investment habits of pension and accumulation phase SMSFs to find if this was actually the case.

The research found that pension SMSFs (which Class defines as having at least one member in pension phase) have a strong preference for domestic shares over international ones. They hold 33% of gross assets in domestic equities compared to 23% for accumulation funds. Only 1.0% of gross pension SMSF assets are held in international shares, compared to 1.2% for accumulation SMSFs.

Accumulation v Pension SMSFs asset allocation, percentage of gross assets of SMSF

Data source: Class Ltd December 2017 SMSF Benchmark Report

This may be driven by a desire for dividend yield. The research found that SMSFs in pension phase earn 7% more gross dividend yield on their Australian shares compared to accumulation SMSFs, 6.18% versus 5.77%.

“The ASX 200 index which provides a yield closer to 5.6% – a clear indication that pension SMSFs are, as assumed, attracted to higher yield stocks,” said Class.

“This preference for domestic shares is likely to be influenced by the fact that franking credits are heavily used by Australian companies and are not generally available for international shares.”

Though pension SMSFs are more likely to invest in some conservatives assets, with 30% of funds holding debt securities compared to 10% of accumulation SMSFs.

Additionally pension SMSFs hold far less property, with the average accumulation SMSF having almost three times as much invested in residential property. SMSFs in accumulation phase are 12 times more likely to borrow to acquire property (7.9% of accumulation funds versus 0.6% of pension SMSFs).

Accumulation v Pension SMSFs asset allocation, percentage of SMSFs holding asset class

Data source: Class Ltd December 2017 SMSF Benchmark Report

“Pension SMSFs have always been cited as a conservative group who are heavily focused on yield,” said Class Ltd CEO Kevin Bungard.

“Our data analysis from the more than 150,000 SMSFs on Class validates this, but importantly delivers depth around the types of investments retirees are embracing.”

“It will be interesting to track how investment preferences change over time, as a new set of SMSFs move into pension phase.”

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