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A Stocks and Shares ISA is a brilliant way to build a stream of passive income for retirement, using the dividends paid by FTSE 100 and FTSE 250 stocks. All share price growth and dividend income is tax-free for life, in contrast to pension withdrawals.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Starting at 40, if someone invested £500 a month in an ISA and it grew at 7% a year on average, with dividends reinvested, they’d have a meaty £478,000 at retirement. This assumes they stop working at age 67.
Using the 4% withdrawal rule, which assumes investors can take 4% of their pot annually without eating into the capital, that would give them a passive income of £19,120 a year. This works out as almost £1,600 a month. And remember, they’d still have their capital, to dip into as needed or pass on to loved ones.
Building wealth from FTSE shares
Market swings are unavoidable, but regular contributions help smooth the ride. I target FTSE 100 and FTSE 250 shares with reliable dividends and growth prospects.
One FTSE 100 stock that’s caught my eye is Admiral Group (LSE: ADM). Best known for car insurance, it also sells home and travel policies. The Admiral share price is up 28% in the past year and 60% over three years. It now pays a trailing yield of 4.36%, offering a solid income alongside its capital growth potential.
That yield looks set to rise sharply. On 14 August, Admiral reported a 69% jump in first-half profits to £521m, helped by wider margins as insurance prices fell. The board responded by lifting the dividend 62%. Analysts expect the yield to hit 6.55% in 2025 then 6.63% in 2026.
Admiral is a dividend hero
That’s impressive although dividends are never guaranteed. The share price has plateaued over the last six months, but looks decent value trading on a price-to-earnings ratio of 15, well below the FTSE 100 average P/E of 18.
No stock is without risks. An increase in motor claims could squeeze underwriting margins, while future interest rate cuts could impact investment returns.
Competition in motor insurance is fierce, and consumers are still feeling the squeeze. Even so, Admiral’s track record of rewarding shareholders suggests considering it could help towards building that a £6,000-a-year ISA income target.
Investing across a balanced portfolio of at least a dozen FTSE 100 shares, and possibly more from the FTSE 250, offers both dividend income and potential growth. Consistency, patience, and a long-term view are key. The miracle of compound returns rewards those who stick with a plan over decades.
Planning for the long-term
Building a meaningful ISA pot takes time, but regular monthly contributions, reinvested dividends, and a focus on well-managed dividend payers can make the £500-a-month savings plan achievable.
Today, some FTSE stocks yield a lot more than Admiral, some more than 8% a year. It could be time to check them out. Remember, that’s tax-free inside a Stocks and Shares ISA.
