With the state pension age likely to be increased further, I reckon a Stocks and Shares ISA is the best way of achieving a sizeable income later in life.
This is how I’d go about it.
1. Open an account
The first thing to do is find an ISA provider. All those over 18 — who are UK residents for tax purposes — can open an account.
There are many to choose from, so a personal recommendation is often the best way of finding one.
Fees will vary so it’s important to compare costs.
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.
2. Start saving
Ideally, I’d start with a lump sum. It’s possible to invest up to £20,000 each year. But that’s a lot of money to find. Instead, I’d plan to invest a fixed amount each month.
According to the Office of National Statistics, average household disposable income in 2022 was £32,200.
After paying for the necessities of life, and making a few sacrifices, I reckon £150 a month would be a realistic amount to save.
3. Decide what to invest it
For a simple life, the easiest thing to do would be to put the money into a tracker fund. These aim to match the performance of a particular index or sector without having to own each individual stock.
Some investors prefer the tech-heavy NASDAQ whereas more cautious ones — like myself — tend to restrict their investments to the FTSE 100.
I can’t see into the future. Therefore, the only guide I have as to what returns a FTSE 100 tracker fund might generate in the future, is history.
According to IG, between 1984 and 2022, the index of the UK’s largest 100 listed companies grew by an average of 5.3% per year.
4. Reinvest those dividends
As tempting as it might be to take the dividends generated and spend them on something frivolous, I’d reinvest them instead.
IG found by doing this, the historical return from the FTSE 100 increased to an average of 7.4% each year.
This shows the power of compounding, which has been described as the eighth wonder of the world.
5. Sit back and watch
Plugging these numbers into a spreadsheet reveals that I could have a portfolio of £130,296 within 25 years.
| Period | ISA value at 7.4% annual growth rate (£) |
| 1 year | 1,874 |
| 3 years | 6,063 |
| 5 years | 10,918 |
| 10 years | 26,706 |
| 15 years | 49,537 |
| 20 years | 82,553 |
| 25 years | 130,296 |
At this point I could reinvest the cash in high-yielding dividend stocks. Obviously, I have no idea what the level of shareholder payouts might be like in 2048. But based on what’s available today, I think a return of 8% a year is realistic.
This would give me a second income of £10,423 each year.
A higher figure could be achieved by investing more for longer. For example, putting aside £250 each month for 40 years, could result in a portfolio of £739,261, and an annual second income of £59,140.
Final words
This all sounds very easy. But it’s important to remember that the past is not necessarily a reliable guide to the future.
And my figures ignore fees, although the market for ISA providers is a competitive one so these shouldn’t make too much difference.
But with no tax to pay on any capital gains or income, I think a Stocks and Shares ISA is the best way for me to invest in the stock market. I try and put as much away as I can, conscious that over the long term, this should help boost my retirement income.
