How much do you need in a Stocks and Shares ISA to aim for a £1,000 monthly income?
A Stocks and Shares ISA is one of the best ways for UK investors to build long-term wealth. It doesnât offer upfront tax relief like a pension, but all capital growth and dividends are free from tax for life, which is a major benefit.
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.
Investors can put in up to £20,000 each year. So how much would need to be invested to generate a tax-free £12,000 annual income, or £1,000 a month, in later life?
Crunching the numbers
The 4% rule is often used as a guide. It suggests that if investors draw down 4% of their pot each year, it should last for life. That means a £12,000 income would require a £300,000 ISA.
That sounds daunting, but over 30 years itâs more achievable than it looks. Someone investing just under £250 a month at an average return of 7% could get there. That shows the power of compounding, where share price growth and reinvested dividends build on themselves year after year. As ever, it pays to start early â and throw in lump sums whenever possible.
Investors can achieve those returns by holding a spread of quality shares, ideally across a portfolio of around 15 or 20 companies. Some will disappoint, others will deliver better than expected, but over time the mix should even out.
Imperial Brands for income and growth
One stock thatâs done really well is Imperial Brands Group (LSE: IMB). This is a cigarette maker, which means it wonât be to everybodyâs tastes. I donât personally invest in the sector, yet I canât deny that big tobacco has been an extraordinary source of both dividend income and share price growth.
The Imperial Brands share price is up 41% over the last year and 128% over five years, with dividends on top. At points, the stock has yielded as much as 8% a year. Today it sits just above 5%, still well ahead of the FTSE 100 average of around 3.5%.
Smoking kills but that doesn’t stop the world from smoking five trillion cigarettes a year, while companies are also pushing newer products such as vapes and heated tobacco. These alternatives may bring their own health issues, just as the old nicotine delivery system did, firing up regulators. Another unknown is whether appetite suppressants like Wegovy and Ozempic could curb the desire to smoke. Even so, the addictive nature of nicotine continues to underpin cash flows.
Building a lasting retirement pot
Regulation is always a risk, as are changing consumer habits, but Imperial Brands has shown it can keep rewarding shareholders. Investors might consider buying tobacco stocks if they can live with the ethical questions, but there are plenty of top FTSE 100 and FTSE 250 income stocks if they don’t.
A portfolio built from a mix of dividend-payers and growth stocks, held inside a Stocks and Shares ISA, can spread risk and with luck, compound into a substantial retirement pot. Starting early helps. However, ambitious the second income goal, thereâs no time to lose.
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More reading
- See how much youâd need in a SIPP to target a £2,500 monthly retirement income
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- 2 cheap FTSE 100 growth shares I won’t touch with a bargepole!
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- How to use dividend stocks and an ISA to target a £12,000 second income
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands 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.
