When it comes to planning for retirement, buy-to-let investments have been a popular means of building a nest egg for older age. They have delivered strong and robust capital growth over the last few decades, while increasing rents have provided landlords with rising cash flow at a time where falling interest rates have boosted net returns.
However, the prospects for buy-to-let have changed significantly in recent years. Although further capital growth may be on offer, increasing taxes and the prospect of higher interest rates may mean the investment appeal of property declines.
As such, now could be the right time to diversify, or even pivot, towards FTSE 100 shares. Their tax efficiency, simplicity and potential for high returns may make them a superior means of obtaining a large retirement fund.
Buy-to-let challenges
With a continued shortage of property in the UK compared to rising demand, house prices may continue their upward trajectory following a current period of slower growth.
However, capitalising on that growth potential appears to be becoming increasingly difficult for investors. This is due to the introduction of a 3% stamp duty surcharge on second homes, as well as reduced scope to offset interest payments against rental income.
Alongside this, an end to tenancy fees may mean landlords absorb estate agent costs through higher management fees, while the prospect of a change in government may mean policies such as Help to Buy come to an end sooner than expected.
As such, the potential to generate high returns from even a rising housing market may be increasingly subdued. Should interest rates rise even modestly, as expected, over the next few years, investors in property may find that their net returns are relatively low.
FTSE 100 appeal
Although the FTSE 100 also faces an uncertain future at present, due to the ongoing global trade war, it could be easier to build a nest egg from large-cap shares than from buy-to-let investments.
The tax efficiency of equities remains high, with financial products such as a Stocks and Shares ISA offering the avoidance of dividend tax, income tax and capital gains tax. In addition, the index’s international focus may mean it avoids some of the impact of uncertainty facing the UK from a political perspective, while the valuations of its members suggest many are trading below their historic averages.
With the index having a long track record of growth, buying a range of FTSE 100 companies could be a simple means of building a nest egg for retirement. It requires far less effort than a buy-to-let, in terms of obtaining finance, managing a property, and navigating seemingly ever-changing tax rules. As such, now could be the right time to buy the FTSE 100 following its dip from a 2018 record high, with the index appearing to offer a range of stocks that trade at discounts to their intrinsic values.
