Is buy-to-let the best way to boost your retirement income as the State Pension age rises?
The appeal of the State Pension is set to decline over the long run. The State Pension age is expected to increase to 68 within the next 20 years, while the current ‘triple-lock’ appears to be unaffordable over the long term, given the expected increase in number of retirees.
Individuals may, therefore, be searching for a means of generating an income in retirement so that they are not reliant on the state. Buy-to-lets have generally been popular in the last couple of decades, with rising house prices and falling interest rates holding appeal for investors. However, with a range of tax changes and an uncertain economic outlook, is property really the best means of overcoming the shortcomings of the increasingly unattractive State Pension?
With interest rates close to their historic lows, they are likely to move upwards over the next decade. Certainly, they could be held back or even dropped in the near term. Brexit could cause challenges for the UK economy and an uncertain future for the economy may mean that the Bank of England seeks to put in place a more accommodative monetary policy. However, with history showing that interest rates have never stood still for too long, a more hawkish monetary policy could be ahead.
This would negatively affect the returns available to investors over the coming years. Those issues surrounding the prospects for the UK economy could also mean that increases in rent may not be as impressive as they have been in previous years. And if the economy experiences further downgrades to its growth outlook, it could suggest that house price growth since the financial crisis may at least take a pause over the medium term.
Of course, perhaps the biggest change affecting buy-to-let investors is the tax paid on investment properties. Many landlords will find that their mortgage interest payments will no longer be tax deductible, while the cost of a buy-to-let has increased due to changes in stamp duty on second homes.
There appears to be a political consensus that the UK faces a housing shortage. As such, it would be unsurprising for buy-to-lets to be subject to further tax and regulatory changes over the medium term, with the government seeking to tip the balance towards owner-occupiers, and away from buy-to-lets.
As such, the prospects for the industry appear to be relatively unfavourable. Certainly, there could be further growth in house prices over the coming years, but owning properties outright may not be the best way to access this from a risk/reward perspective.
Rather, buying shares in housebuilders, REITs or listed landlords could be a shrewd move for investors keen to overcome the declining prospects for the State Pension. Alongside a range of other stocks, they could lead to impressive returns, as well as lower risks from tax and regulatory changes.
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