Retirees receiving the State Pension are currently entitled to an income of £168.60 of a week, or £8,767.20 a year. For many pensioners, this token income stream won’t be enough to live comfortably in retirement.
So, the best way to make sure you don’t run into financial trouble when you finally quit the rat race is to supplement your State Pension with income from another source.
Many savers have turned to buy-to-let property as a way to supplement their State Pension income. Others have chosen to invest in stocks through a tax-efficient wrapper such as SIPP or ISA. Both of these methods have their strengths and drawbacks.
However, I believe the FTSE 100 will prove to be a much better investment for your money over the long term than buy-to-let property for one key reason.
Risk versus reward There’s no denying buy-to-let property has generated a tremendous amount of wealth for investors over the past few decades. Equities have as well, although many investors have made more money from property because it’s relatively easy to borrow to boost returns.
Unfortunately, the buy-to-let property market has changed drastically over the past five years. The government has closed a number of a lucrative tax loopholes for investors while introducing regulations that have made it harder for landlords to get away with letting substandard property. As a result, the costs of being a landlord have escalated.
Adding to the problem of rising costs and increasing regulation, there’s also the diversification question to consider with buy-to-let.
Plenty of diversification With buy-to-let property, to be adequately diversified, you should own several properties to build a steady income stream that you can rely on in retirement. Owning one property could actually make life harder because if you can’t get a tenant for six months, you might end up having to pay out to maintain the property. That’s not exactly what you want when you have a fixed pension income.
The lack of diversification and risk means you might have to fork out extra funds if your buy-to-let property doesn’t have a tenant and is probably the biggest black mark against the asset class.
In comparison, the FTSE 100, which currently supports the dividend yield around 4.7%, offers a diversified income stream from 100 of the largest companies in the world. These companies operate in a range of different industries, from oil to real estate and catering, so the income should continue to flow no matter what happens to commodity prices or economic growth.
You can also own an FTSE 100 tracker inside a tax-efficient wrapper, which means you don’t have to worry about the new tax laws for landlords.
The bottom line So, overall, unlike buy-to-let property, which requires you to effectively run a business, with the FTSE 100 you can sit back, relax and watch the income roll in. That’s why I would buy the UK’s leading blue-chip index over a buy-to-let property to supplement my pension income any day.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019