Consider this strategy to target £25,000 in retirement income from a Stocks and Shares ISA

How much would a UK investor need in a tax-efficient Stocks and Shares ISA to retire comfortably? This is a question that popped up recently during a conversation I had regarding passive income.

Naturally, there’s no exact answer as it depends largely on each individual’s interpretation of comfortable. Further to that, it depends on whether the investor is looking for regular income or simply enough savings to live off.

Realistically, an income-focused investor would need around half a million pounds to achieve a minimal dividend income. Based on an average 5% yield, that could return £25,000 a year — a sufficient amount to supplement a pension. This would also leave the £500k pot intact for emergency expenses.

One strategy to achieve this goal involves high-yield stocks and a dividend reinvestment plan.

Patience and consistency

For investors playing the long game, building a half-a-million-pound portfolio needn’t be a pipedream — it’s a matter of patience, consistency and compounding. The ISA provides the tax-free wrapper and a high-yield, dividend-growing portfolio does the hard work..

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.

Savvy investors may want to consider a stock like Rathbones Group (LSE: RAT). With a 5.5% yield, it’s enjoyed 15 years of consistent dividend growth at an average rate of 6.9% annually.

The wealth manager has been around since 1742 and holds over £100bn in funds under management, primarily serving high-net-worth individuals and charities. It’s not exactly a headline-grabbing stock, just a solid, reliable business.

The power of reinvestment

Let’s say an investor starts with a modest lump sum of £20,000 and reinvests all dividends. By contributing a moderate £5,000 a year inside an ISA, with Rathbones’ historical 5.5% yield and 6.9% annual dividend growth, they could hit the £500,000 mark in around 21 years. Increase the annual contributions or catch the stock undervalued, and that timeline shortens. At the same, it could lengthen if the stock goes through weak periods.

Here’s the kicker: compounding doesn’t just happen at the account level — it’s supercharged when the dividends themselves are rising. Each reinvested payout buys more shares, which in turn produce larger dividends. It’s a snowball effect: early gains look tiny but later years do the heavy lifting.

Risks? Always

No investment’s bulletproof, and Rathbones is no exception. Wealth managers are sensitive to market cycles, so a prolonged downturn in the market could dent its fee income. This year’s integration of Investec Wealth & Investment, following their recent merger, adds execution risk. And while dividend growth has been strong, there’s no guarantee it’ll continue indefinitely.

Also, financial services is a competitive sector. If lower-cost platforms eat into its client base, Rathbones may have to adjust its fee model, threatening overall returns. It’s always important to keep an eye on the underlying business — not just the dividend track record.

A realistic goal

A diversified portfolio of stocks like Rathbones, with an average 5% yield, could help build a long-term passive income machine inside a Stocks and Shares ISA. Stocks to look for should offer a mix of a decent yield, consistent dividend growth and business stability.

The key is to start early, reinvest, and be patient — eventually, that £500k could stop being a dream and start looking like a realistic goal.

The post Consider this strategy to target £25,000 in retirement income from a Stocks and Shares ISA appeared first on The Motley Fool UK.

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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Rathbones Group Plc. 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.

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