A Stocks and Shares ISA allowance is a brilliant way to build a large pot of money for retirement. And it’s an even better method of generating passive income to fund our final years.
Money invested inside the tax-free allowance rolls up free of all capital gains tax (CGT) and income tax.
That means we don’t have to pay a penny in CGT to HMRC when our stock picks rise in value. Even better, we can reinvest all of the company dividends received straight back into the portfolio without paying a penny in tax on them.
FTSE 100 shares are top income stocks
When an investor retires, they can draw one-off lump sums or regular dividends entirely tax free. This makes managing overall tax liability easier. By juggling pension and ISA withdrawals, an investor can avoid getting pushed into a higher tax bracket. These tax benefits last for life.
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.
Let’s say an investor’s target retirement income is £40,000 a year. If they get £12,000 from the state pension, and another £12,000 from a company pension, they’d still be £16,000 short. So how much would they need in a Stocks and Shares ISA to generate that?
The answer partly depends on the type of shares they buy. Let’s say they start with FTSE 100 bank HSBC Holdings (LSE: HSBA).
Today, the bank has a trailing dividend yield of 5.99%. That’s a brilliant rate of income, comfortably above the FTSE 100 average of 3.5%. Although dividends aren’t guaranteed, companies need to generate sufficient profits to fund them.
HSBC has actually been on my own Buy list for months. The Asia-focused bank looks terrific value, trading at just 8.9 times trailings earnings. That’s cheap for a bank that increased profits by 10% to $8.5bn in Q3, smashing analysts’ expectations of $7.6bn.
The board has been further rewarding shareholders to the tune of $3bn per quarter, in the form of share buybacks.
No stock is without risk. New CEO Georges Elhedery has to navigate US-China tensions, manage the planned split between its Eastern and Western divisions, and sustain growth as falling interest rates squeeze margins. Yet, I’m still keen to buy.
The HSBC share price could rise too
Investing in a dozen different FTSE 100 shares would spread risk. If an average yield of 6% could be generated from those shares, an investor would need £266,667 in their Stocks and Shares ISA to generate £16,000 a year.
That looks like a tall order but it’s doable, given time. With £300 invested every month and with an average total return of 8% a year, it would take just under 25 years. If that monthly sum is increased every year to keep pace with inflation, the goal could be achieved sooner.
Better still, the dividend income should rise over time as most companies aim to increase their shareholder profits every year if they can. There are no guarantees. A portfolio can make or less than expected. But having a target to aim for is a great start.
The post How much an investor would need in a Stocks and Shares ISA to earn a £16,000 yearly income appeared first on The Motley Fool UK.
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More reading
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2 super-value FTSE 100 shares to consider right now!
3 FTSE 100 shares that could make it rain dividends in 2025
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.
