How I’d use my £20,000 Stocks & Shares ISA allowance to retire early

Dreaming of early retirement? Here’s how our writer would invest in a Stocks and Shares ISA to generate tax-free passive income for life.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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The Stocks and Shares ISA is a generous investment wrapper by global standards. I intend to use my £20,000 annual allowance to secure tax-free capital gains and dividends from my investments.

Accordingly, investing in a S&S ISA forms an essential part of my early retirement plan. Here’s how I’d go about achieving that goal.

Early retirement planning

Harnessing the power of compound interest is crucial in building a healthy retirement pot. The tax advantages associated with pension contributions make them an attractive starting point. However, given age restrictions on withdrawals, pensions are only part of the solution for early retirement.

This is where the Stocks and Shares ISA comes into play. I’d split capital allocations carefully between my pension and ISA, reinvesting any dividends in the process. Eventually, I’d use the latter as a ‘bridge’ from my early retirement date to the date I’m eligible to make pension withdrawals.

With a plan in place, let’s turn to how I’d invest in my ISA.

Growth stocks

First, I’d identify growth stocks with potential for capital value increases.

Ceres Power (LSE: CWR) is one FTSE 250 growth stock on my watchlist. The early-stage hydrogen technology company stands to benefit from the green industrial revolution. Down 45% this year, the Ceres Power share price looks cheap to me at 531p.

The company’s latest financial results show promise. Cash and investments rose to £250m from £110m the year before following a successful fundraising. Revenue grew by 44% to £31.7m. Furthermore, Ceres Power boosted its employee headcount to 489 — a 50% increase.

Ceres Power recently partnered with Bosch and Weichai Power to target China’s fuel cells market. Last month, speculation that Bosch may launch a takeover bid for Ceres Power lifted its shares by 10%, although it has since relinquished these gains.

Speculative trading behaviour carries risks. Should any prospective acquisition fall through, this could spark heavy selling in Ceres Power shares.

Dividend stocks

Next, I’d focus on dividend stocks to generate passive income streams.

A good example is FTSE 100 housebuilder Barratt Developments (LSE: BDEV). It offers a 6.7% dividend yield. Down 34% this year and with a reasonable price-to-earnings ratio below eight, I see value in Barratt Developments shares.

In its latest trading update, the business confirmed it’s on track to deliver between 18,000 to 18,250 home completions — in line with the Board’s previous expectations. Additionally, balance sheet strength has been maintained with projected year-end net cash over £1bn.

Rising interest rates could depress UK house prices. This would be a headwind for the Barratt Developments share price. However, a shortage in new homes being built means that the long-run outlook remains positive for this dividend stock for me.

Aiming for ISA millionaire status

The elite Stocks and Shares ISA millionaires club is 2,000 strong. Assuming a 7% annual compound growth rate, I could hit the magic £1m target in 22 years by consistently using up my annual allowance — more than enough for a prosperous retirement.

Granted, that calculation rests on big assumptions and contributing £20,000 per year would be no mean feat. Nonetheless, it’s a worthwhile ambition and not an impossible one to realise by diligently applying Foolish investing principles over decades!

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Charlie Carman 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.

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