While saving money for retirement is a worthwhile move, returns on Cash ISAs continue to be insufficient to provide financial freedom in retirement. For example, the best cash savings rates are around 1.5% at the time of writing, which is lower than the rate of inflation.
Although many investors may therefore lean towards buying property through a buy-to-let due to the rise in property prices over recent decades, the industry appears to lack investment appeal at the present time. A variety of tax changes and high valuations may mean that investing in a range of FTSE 100 shares is a better move.
Property investing has become increasingly complex in recent years. Tax changes mean that mortgage interest payments cannot be offset against rental income for many landlords, while additional stamp duty payable on second home purchases reduces overall returns.
Furthermore, it has become increasingly difficult to obtain finance on buy-to-let properties. Changes to lending rules mean that there are more stringent tests in place that could lead to lower demand for properties at a time when prices are relatively high. This could cause a drop in prices in some areas, with London especially vulnerable to a difficult period as the Brexit process drags on.
Therefore, while buy-to-let investing could still offer high returns in the long run, it is becoming increasingly difficult for investors with relatively small portfolios to see positive cash flow from their investments each month.
FTSE 100 opportunities
By contrast, the FTSE 100 appears to have a more appealing risk/reward opportunity than buy-to-let. Despite its recent rise, the index still offers a dividend yield of over 4%, which is relatively high. Although there are risks facing the global economy, major economies such as the US and China are forecast to post continued strong GDP growth rates over the medium term. This could mean that there are opportunities for large-cap stocks that have access to a variety of regions to post improving net profit in the coming years.
While buy-to-let investing has become more challenging, buying FTSE 100 shares seems to be easier than ever. It is possible to open an online share-dealing account in minutes, while tax-efficient products such as a Stocks and Shares ISA can boost an individual’s returns. And with mobile apps such as Moneybox allowing smaller investors to invest in shares with a minimum amount of effort, accessing the returns of the stock market has never been simpler.
Of course, the FTSE 100 has experienced a decade-long bull market. Some investors may therefore feel that it is due to face a more challenging period over the next few years. While this cannot be ruled out, the stock market appears to offer a more favourable risk/reward opportunity than buy-to-let investing. It is more tax efficient, has a lower valuation compared to historic levels, and since the process of buying shares is much easier than buying a property, could mean less effort is required by the individual concerned.