No state pension? I’d drip-feed £100 a month into a Stocks and Shares ISA for a £20,793 second income

A State Pension is looking less and less likely in the future. Here’s how to replace the income with the wealth-building power of a Stocks and Shares ISA.

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Could I replace my pension by investing £100 a month in a Stocks and Shares ISA? The sad truth is: I might need to.

For those of us under 40 years of age, the prospect of a State Pension is a distant one. A few decades from now, state assistance in retirement might be paltry. It might not exist at all. 

I read an article in The Telegraph recently that outlined the scale of the problem. I can save you a read by sharing the subheading: “The kindest thing we could tell young people is: don’t expect a taxpayer funded retirement”. 

Whether the looming spectres of an ageing population and a low birth rate jeopardise the state pension or not, there’s nothing I can do about it. 

What I can control is my own finances, and the threat to my future pension means I think it’s more important than ever to do so. I could even take that £100 a month and target a £20,793 second income from a Stocks and Shares ISA. Here’s my roadmap to achieving that. 

Lucrative returns

The Stocks and Shares ISA is crucial here because it’s tax-advantaged. With this account, I sidestep both capital gains tax and dividend tax. 

Both taxes would otherwise need to be paid from my earnings from the stock market. This alone makes it look more attractive than other options. The earnings from a buy-to-let, for instance, is taxed as income and can be as high as 45%.

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.

Making money through a Stocks and Shares ISA is a breeze too. I research my company then buy the stock. Once that’s done, I am too. It’s the company making sales and income that gives me a return. I don’t have to lift a finger. That’s true passive income. 

Investing like this has proved lucrative for decades and even centuries. The naysayers might point to a recession here or a stock market crash there, but the markets have rebounded every single time. There’s a reason this is the favoured option for private pensions to grow wealth. I’ll simply be looking to take matters into my own hands.

The data shows that people have made big money in these ISAs. It’s now 4,000 ISAs that have made it to the £1m mark. The accounts have deposit limits too, so it’s not like those are rich people who just put a lot of money in, they had to invest their way up to a million.

Second income

I’m not aiming for £1m though, as I only have £100 a month to work with. How much could I make with that? Well, I can’t do the calculation in my head, but even if I target a 10% yearly return, I wouldn’t expect to replace a State Pension with it. 

The answer, though, is surprising. Over a 30-year timeframe, my £100 a month builds up to a £207,929 nest egg. The next year after that, a 10% return gives back £20,793 as a second income. Splendid. 

I wouldn’t look to withdraw all that each year though. The stock market is volatile and the amount I receive each year would be inconsistent. Some years I’d lose money. For this reason, if I withdraw too much too fast, I may get unlucky and whittle my nest egg down.

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 assessed. Consider taking independent financial advice.

John Fieldsend 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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