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Warning! Buy-to-let property could hurt your retirement savings

Buy-to-let investing used to be a great way to supplement your income in retirement. However, over recent years, tax changes coupled with additional regulation for residential landlords means making money from rental property is not as easy as it used to be.

The most significant change has been the cut to mortgage tax relief. From the 2017/18 tax year, investors were only able to deduct 75% of their mortgage interest from tax bills. This figure will be reduced to just 25% over the next three tax years before being replaced by a flat 20% credit.

Harder to make money

These changes have made it much harder for landlords to make an acceptable return on their properties. Landlords who’ve brought properties in recent years with large mortgages have been particularly severely affected.

On top of these tax changes, the government has also introduced energy efficiency rules, which are set to come into force in April 2020 and legislated against tenancy fees. Further, tenants can now sue landlords for cold or damp homes, forcing them to carry out any necessary repairs.

All of these changes mean buy-to-let investing is no longer the guaranteed income stream it once was. Landlords now face the prospect of costly court cases or maintenance bills if their properties are not up to standard. This could lump you with devastating charges if you’re relying on buy-to-let property to give you a pension income. If your property isn’t up to scratch, your retirement income could be swallowed up entirely by repair bills.

A better option

Considering all of the above, I think the better choice for retirees is to invest their money. The most significant benefit of using stocks, rather than bricks & mortar, is that they’re liquid. You can buy and sell equities at the click of a button whenever the market is open. You can also invest in businesses around the world and have managers run the companies for you.

The simplest way to invest is to buy a low-cost FTSE 100 tracker fund. This is an index of the top 100 companies in the UK and will provide you with a steady income in retirement. The dividend yield currently stands at 4.5%. You can also own the tracker in a tax-free wrapper, so there’s no need to worry about additional tax charges.

If you’re looking to take on a bit more risk and generate higher returns, a FTSE 250 tracker fund might be a better solution. This index has outperformed the FTSE 100 by around 3% per annum over the past decade. It doesn’t offer the same level of dividend income, but you can always sell off some of your holdings to generate an income if needed.

Single blue-chip stocks could provide another solution. Right now, there are blue-chip stocks that offer dividend yields of 6% or more, which is around the same level of income most buy-to-let investors receive from their properties.

To put it another way, you can generate the same level of income by investing in blue-chip stocks instead of rental property without having to worry about extra tax obligations or being taken to court by your tenants.

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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.