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With a Stocks and Shares ISA, Brits have an excellent chance of earning a robust retirement income. These investing products target the immense wealth-growing power of the stock market. They also provide protection from capital gains, dividend, and income taxes.
But how much would you need in one of these tax-efficient products for a secure retirement? Research suggests it could be £2,661 a month. That’s a lot of cash on paper, but with patience it’s a very achievable target.
Let me show you how.
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.
The ISA boost
The exact amount needed to retire with financial security will differ from person to person. After all, what constitutes a ‘comfortable’ retirement can differ considerably. However, data from Pensions UK provides a helpful jumping off point for our calculations.
They predict that Brits will need a total income of £43,900 a year to live comfortably. Stripping out the full State Pension of £11,973, that leaves a shortfall of £31,927 that needs to be made up. That’s the equivalent of our £2,661 a month.
With a Stocks and Shares ISA, it’s a figure that’s plenty possible thanks to:
- Safeguarding from capital gains tax and dividend tax, giving investors more cash to boost the compounding process.
- Exclusion from income tax on withdrawals, meaning every penny earned can be used for living expenses.
- The exceptional long-term returns of share investing, which average 8% to 10% over the long term.
Crunching the numbers
Of course, reaching this target requires some work on the part of the investor. A commitment to setting cash aside regularly and carefully building a portfolio to deliver that second income are required. It’s also critical to hold a diversified selection of shares, investment trusts, and funds to limit volatility, reduce risk, and capture different growth and income opportunities.
For a £2,661 monthly passive income, someone would need a Stocks and Shares ISA of roughly £456,000. That’s assuming they used their nest egg to purchase 8%-yielding dividend shares, a strategy that can deliver passive income and sustained portfolio growth.
Now let’s say they’re looking to retire 30 years after they open their ISA. If they can achieve an annual return of 9%, they’d need to invest just under £250 a month.
A FTSE 100 share to consider?
Funds and trusts can balance out a portfolio. Supplementing this with individual stock picking can supercharge one’s chances of building big ISA riches.
During the last decade, Games Workshop (LSE:GAW) has been one of the best-performing FTSE 100 shares. In 2016, it was in the FTSE 250 with a market capitalisation of £170m. Now it’s one of the Footsie’s greatest growth heroes with a value of £5.4bn.
I’m convinced the company can keep outperforming, which is why I hold it in my portfolio. Its operations are niche — not everyone gets the appeal of tabletop gaming. But it’s a rapidly growing market, which Games Workshop has cornered with its Warhammer line of products.
Profits could underwhelm during economic downturns when consumers cut back on spending. But the FTSE firm’s proven largely resilient to such pressures thus far. I think it can continue to power ISA investors’ returns.
