The State Pension currently amounts to £8,546 per year. That works out as just £712 a month, which is unlikely to be sufficient for most people to enjoy a financially-free retirement. In fact, it amounts to around a third of the average annual salary, which suggests that most individuals will need to put in place alternative arrangements in order to have the income they require in retirement.
Buy-to-let has often been seen as a logical means of providing an income in retirement. Buying a property and letting it out means that a tenant will cover the cost of the mortgage over a 25-year period. Then, in retirement, an individual will have an income which could boost their State Pension.
However, changes in buy-to-let mean its appeal is declining, and investing elsewhere could prove to be a better idea.
Changing industry
One of the key challenges facing buy-to-let investors could be mortgage availability. Regulators have sought to improve the resilience of the housing market by putting in place stricter mortgage criteria for buy-to-let investors. This includes an assumption that interest rates will rise over the medium term, which means there must be a relatively healthy amount of headroom when using rental payments to pay the mortgage.
As well as a tightening of lending criteria, the buy-to-let industry could be impacted by challenges facing the UK economy. Clearly, predicting the impact of Brexit is an impossible task, since little is known about how a future trading relationship between the UK and EU will look. But with nearly one in 10 tenants in the private rented sector already in arrears at the present time, economic challenges could pose a serious threat to rental income for buy-to-let investors.
Improving prospects
In contrast, the outlook for the stock market seems to be improving. A number of UK-listed shares have exposure to the fastest-growing regions of the world, where increasing wealth and consumerism is driving their profit higher. This trend looks set to continue, with major economies, such as India and China, expected to provide a tailwind to a variety of industries over the coming years.
Since the FTSE 100 has declined since reaching an all-time high in May 2018, it now appears to offer good value for money. Its dividend yield of over 4% is relatively high when compared to its historic range. Since other major indices such as the S&P 500 have a lower yield than the FTSE 100, the UK’s major index could offer good value for money on a relative basis. For example, the S&P 500’s dividend yield is around 2%, which means the FTSE 100 could double and still be as attractively priced from a dividend perspective as its US peer.
As such, the appeal of buy-to-let seems to be limited when compared to the stock market. While the former has been a worthwhile means of boosting the State Pension in the past, buying stocks could be a superior means of doing so in the future.