How much would an investor need in a Stocks and Shares ISA to earn £16,000 a year
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A Stocks and Shares ISA allowance is a great way to build a bigger pot of retirement income. It is also the best way to generate income to fund our final years.
Money invested within the tax free allowance grows 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 goes up in value. Even better, we can reinvest all of the company’s earnings directly into the portfolio without paying a dime of tax on them.
FTSE 100 stocks are high income stocks
When an investor retires, they can withdraw a lump sum or regular dividends tax-free. This makes managing the tax liability easier. By combining a pension with a withdrawal ISA, an investor can avoid being 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 change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and 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 the company pension, they will still be £16,000 short. So how much will they need in a Stocks and Shares ISA to do that?
The answer partly depends on the type of stocks they buy. Let’s say they start FTSE 100 the bank HSBC Holdings (LSE: HSBA).
Currently, the Bank has an annual yield of 5.99%. That’s an excellent rate of return, above the FTSE 100 average of 3.5%. Although dividends are not guaranteed, companies need to make enough profit to finance themselves.
HSBC has actually been on my shopping list for months. The Asia-focused bank looks great, trading at just 8.9 times trailing 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 also rewarded shareholders to the tune of $3bn each quarter, in the form of share buybacks.
No stock is without risk. New CEO Georges Elhedery must manage US-China tensions, manage the planned split between its Eastern and Western divisions, and continue to grow as falling interest rates squeeze margins. However, I am still willing to buy.
HSBC’s share price could also rise
Investing in different FTSE 100 stocks can spread the risk. If an average yield of 6% can be achieved on those shares, an investor would need £266,667 in their Stock and Shares ISA to generate £16,000 a year.
That seems like a tall order but it is possible, given the time. With an investment of £300 every month and an average return of 8% per annum, it would take less than 25 years. If that monthly amount increases every year to keep pace with inflation, the goal can be reached quickly.
Even better, dividend income should increase over time since most companies aim to increase their shareholder returns every year if they can. There are no guarantees. The portfolio may perform or underperform expectations. But having a target to aim for is a good start.
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