How much income can you generate from a £150,000 Stocks and Shares ISA?
For many investors, the point of building wealth in a Stocks and Shares ISA is to generate a second income in retirement. But they don’t always know how big their portfolio must be to deliver the income they want. So is £150,000 enough? It looks a pretty decent target but what do investors get in return?
Investing in FTSE 100 shares
One method of calculating this is to apply the tried-and-tested 4% withdrawal rule. This states that drawing 4% from a portfolio each year should allow the underlying capital to last (almost) indefinitely. On £150,000, that would deliver income of £6,000 a year, or £500 a month. Thatâs a nice source of passive income, but hardly life-changing.
Instead of simply following the 4% rule, investors might look to dividends. A balanced portfolio of FTSE 100 shares with an average yield of 6% could generate £9,000 a year. Push the yield to 7% by investing in stocks paying higher dividends and the passive income climbs to £10,500. Dividend payments are never guaranteed and can be cut, but holding 15-20 different companies helps spread risk.
Dividends and growth
Naturally, the bigger the pot, the higher the potential income. Let’s say someone has £150,000 in their Stocks and Shares Isa at 50. They’ve still got 17 years until their retirement age at 67. If their portfolio grows at 8% a year, broadly in line with long-term FTSE 100 returns, the pot could spiral to around £550,000 without adding another penny. Contributing £300 a month on top would push it to roughly £686,225. Thatâs the miracle of compounding at work.
Many prefer the apparent security of a Cash ISA. Today, they pay up to 4.5% on easy access, but this is likely to fall once interest rates are cut. While having cash ready for emergencies is wise, history shows that over the longer run shares deliver a superior total return, from a combination of income and share price growth.
NatWest’s flying
NatWest (LSE: NWG) has caught my attention lately. Its share price has surged 57% over the last year and 335% over five years. Despite that, it still trades on a modest price-to-earnings ratio of just 10.36, which looks cheap compared to many other growth stocks.
NatWest’s also shaken off its past baggage, with the government finally selling the last of its stake 17 years after the £45bn bailout of Royal Bank of Scotland.
Recent results impressed. Half-year operating profits rose 18% to £3.6bn, and the bank launched a £750m share buyback while hiking its dividend 58% to 9.5p a share. Forecasts pointing to yields of 5.44% this year and 6.07% in 2026, which shows how dividend income can rise nicely over time. No guarantees though. The board has to keep making profits and generating cash to fund its largesse.
NatWest may not repeat its spectacular run, but with regular dividends and scope for further growth, it could be a useful part of a balanced ISA. I think it’s worth considering today, with a long-term view.
Nobody should settle for £150,000 if they can help it. Keep investing, keep adding, and let time do the heavy lifting. The bigger the Stocks and Shares ISA, the bigger the potential second income in retirement.
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More reading
- Here’s what a £10,000 investment in NatWest shares 5 years ago is now worth
- How much do you need in an ISA to target a £2,500 monthly income?
- After recording a 52-week high, is there any value left in the NatWest share price?
- Just how high can the skyrocketing NatWest share price go?
- Still at a bargain-basement price, is it time for me to buy more of this FTSE 100 banking star?
Harvey Jones 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.
