Investing in buy-to-let property has been a popular means of planning for retirement over the past few decades. At present, low interest rates and high demand for a limited supply of housing may tempt many investors to focus their capital on property.
However, the FTSE 100 could offer a superior means of planning for retirement. It offers greater tax efficiency, superior valuations, and access to the global growth outlook. As such, now may be the right time to pivot from buy-to-let property to large-cap shares.
Tax efficiency
Tax may not be the most important consideration for many investors. But it should be, since it can have a material impact on your overall returns in the long run.
In recent years, buy-to-let investments have become less attractive due to tax changes. For example, there’s a 3% stamp duty surcharge for second homes, while the scope to offset mortgage interest payments against rental income to reduce your tax bill has declined for many landlords.
Investing in FTSE 100 shares, meanwhile, continues to be highly tax efficient. For example, a Stocks and Shares ISA is a low-cost means of avoiding capital gains, dividend, and income tax. It can be opened in a matter of minutes online and could enable you to generate impressive net returns relative to those available on buy-to-let properties.
Valuations
The ratio of average house prices to average incomes is currently close to record highs. As such, the prospect of house prices rising over the medium term may be somewhat unlikely. After all, if first-time buyers are unable to afford to purchase a home, demand for properties may decline. This could negatively impact on the wider housing market and cause investors to experience lower returns than they have done in the past.
By contrast, the FTSE 100 seems to offer good value for money. It yields around 4.4%, which is above its long-term average, while many of its members have ratings that don’t appear to fully factor in their growth prospects. As such, buying a range of undervalued FTSE 100 shares may not be a difficult process, and could lead to high returns in the coming years.
Global growth
With the UK facing a period of political and economic uncertainty, diversification may be a worthwhile move for any investor. Diversifying geographically within the property market can be difficult. As such, many buy-to-let landlords may have a concentrated portfolio of properties that are focused on a specific location.
The FTSE 100 generates around two-thirds of its income from outside of the UK. As such, it offers investors the chance to benefit from the growth prospects of emerging economies, and also helps to reduce overall risk. In the long run, this could lead to a larger retirement nest egg.