Should you supplement your State Pension with buy-to-let?

If you live with a partner, each of you will get the pension allowance, which would be helpful. But you are unlikely to be holidaying in the Maldives every year in your twilight years on that meagre income. On top of that, the retirement age has been on the rise, and it could rise further before you are old enough to retire.

So, it’s a good idea to supplement the pension with something else if you can, and you might see property ownership as a possible contender for building your pension pot. Indeed, over the past two or three decades, people taking on buy-to-let properties have seen decent returns from rental income and rising property prices and it’s tempting to believe that similar returns could be achievable over the decades to come.

Buy-to-let has changed But things aren’t what they used to be in the world of buy-to-let property. The government’s tax regime surrounding buy-to-let has been changing in a way that makes it harder to turn a profit from such a property. On top of that, property prices have been high for some time and they are much less affordable compared to the average wage than they were around 20 years ago. I believe the lack of affordability will drag on property prices going forward and we could see much lower returns from rising prices than we have done previously.

Yet despite these potential headwinds, getting into buy-to-let remains a big commitment. You will need to either find a large deposit and take on a buy-to-let mortgage or fund the entire purchase price from your savings. Then there will be the gargantuan costs that go along with buying a property, all of which will set back your break-even point from buying and letting your new purchase.

Liquidity and diversity are important Once you are in, it’s very hard to get out. Selling a house or flat heaps more costs on your investment and could take ages, if you can sell it at all. In other words, your investment will be illiquid, which is bad news if you end up making a loss and want to get out of the deal. But perhaps the biggest disadvantage of all is the lack of diversity in your investment. You could end up throwing everything at your buy-to-let purchase with no diversity across other investments, such as other property, shares, bonds or cash savings.

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Instead of buy-to-let, I’d consider an investment in shares to supplement my State Pension. Shares have done better than all other major classes of assets over time. And a share investment is liquid, so you can get in and out with ease and you can diversify across different sectors too. One of the neatest ways to gain all those advantages is to invest in a low-cost tracker fund that follows one of the main share indices, such as the FTSE 100. And if you hold your investment in a stocks and shares ISA all your returns will be free of tax.

Kevin Godbold has no position in any of the shares 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.