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Betting on buy-to-let to help you beat the State Pension? Read this now

According to various studies and surveys, a large number of over-65s and investors reaching retirement are investing in buy-to-let property to support their pension income.

While owning buy-to-let property might produce a certain level of income to boost your State Pension in retirement, I don’t think it’s a sensible strategy to rely on this asset class to produce a predictable income stream after you quit the rat race. Today, I’m going to explain why.

Lower returns

Over the past five years, the economics of buy-to-let investing have changed drastically. New rules on how buy-to-let investing is taxed, as well as the introduction of a host of regulations designed to improve the quality of housing available for renters and catch out rogue landlords, have made it harder for the average buy-to-let investor with just one or two properties to make money from the market.

By comparison, the government has been making it easier for people to save for retirement. There are still lucrative tax breaks available for putting money away in a Self-Invested Pension Plan (SIPP) or other pension products. And the range of investments you can own inside these wrappers is much greater.

In 2017, financial services firm IG Group calculated that £200,000 invested in buy-to-let property would generator potential return for investors of 237% over two decades, once capital gains tax is taken into account. However, if the same investor placed the sum needed for a deposit on a property into a tax-efficient SIPP, the return would be 435%, according to the company’s research.

A changing market

The other problem with buy-to-let property is that it’s an illiquid asset. In a rising market, where demand for property is growing, it’s easy to sell a home. When prices start falling, as they are today in some parts of the country, it becomes harder to sell, which means you could be struggling to offload or property right when you need the money most.

At the same time, keeping the property up to an acceptable standard can be expensive. The last thing you want is a huge bill to repair a broken boiler, or treat rising damp, if your only other income stream is the State Pension.

To put it another way, not only do equities provide better long-term returns after including taxes, but they’re also more flexible. It’s easier to unlock cash when you need it most.

Easy to diversify

The final reason I believe stocks are a better investment for your pension than buy-to-let property is international diversification. Today, you can acquire a portfolio of international income stocks at the click of a button, giving you an income from all around the world without too much exposure to any one single market.

Unless you’re a multi-millionaire, this is virtually impossible to do with buy-to-let property for most investors.

So that’s why I think if you’re betting on buy-to-let to help you beat the State Pension, it might be worth reconsidering your options and switch your investments to equities instead.

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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.