How much do you actually need in a Stocks and Shares ISA to replace your full-time salary?

It might sound strange to SIPP lovers, but a Stocks and Shares ISA is my favourite tax wrapper. It’s free from capital gains and dividend taxes, and I can access it at any time. That makes it more flexible than my SIPP.

It might also be of interest to an investor aiming to replace their salary one day. But how realistic is it to use stock-based investments to ‘earn’ a living? Let’s crunch some numbers.

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.

Replacing a job with a Stocks and Shares ISA

According to the Office for National Statistics, the average full-time salary in the UK is £39,039. If an investor also factors in a State Pension income of around £12k, they will need an income of £27k from a Stocks and Shares ISA.

The widely-used 4% rule suggests that retirees can safely withdraw 4% of their portfolio for at least 30 years.

Using this withdrawal rate, I calculate an investor would need a pot worth £676,650.

There are a few ways to target such a sum. These levers consist of time, investment return and pounds invested. For instance, such a sum could be achieved by investing £1,000 a month for 20 years, at the average yearly investment return of 10%.

The less someone invest, the more time is needed. Alternatively, it could also be achieved with £500 a month, for 15 years, but at a much larger (and much less likely) 25% annual return.

It’s certainly a bigger challenge. But to target such a large performance, investors would need to search for individual shares that could beat the market over time.

Looking at past winners

One such past winner is fantasy miniatures business Games Workshop. It has managed to grow its share price by 30% a year over the past 15 years. And that’s just one example.

But how to find these top-performing shares? Well, the first thing to note is that Games Workshop was a much smaller company back then. Valued at £130m, it would have been classed as small-cap share.

Smaller companies can often grow much faster than larger ones. But bear in mind that they can carry greater risk and can often be more volatile.

A tiny titan that could boost ISA returns

Today, MS International (LSE:MSI) has a market capitalisation of £257m, and mainly operates in defence and security markets. It’s not widely talked about, but for investors looking for undiscovered gems, that’s a good thing.

This small business has delivered exceptional earnings growth of 53% annually over the past five years. Much of that was driven by US defence contracts. In fact, just recently it announced a $42m contract with the US Navy, which should boost sales significantly.

MS should be supported by rising defence spending globally. At the 2025 NATO Summit, all 32 members pledged to allocate 5% of GDP annually by 2035 towards defence and security spending.  

That said, it could take some of these countries a few years to achieve these targets. Also bear in mind that government contracts can often face delays and budget cuts over time. And changing governments can alter priorities.  

I like its 29% return on capital employed as it shows an efficient use of capital. And despite having many growth characteristics, it still offers a reliable 2.1% dividend yield. Overall, I’d call it a high-quality business that’s available at an attractive valuation. And owning shares just like this one could play a big part in building a sufficiently large Stocks and Shares ISA.

The post How much do you actually need in a Stocks and Shares ISA to replace your full-time salary? appeared first on The Motley Fool UK.

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The Motley Fool UK has recommended Games Workshop 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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