By providing protection from wealth-sapping taxes, the Stocks and Shares ISA can substantially boost an investor’s chance to build a robust fund for retirement.
But how much would someone need to invest each month in a Stocks and Shares ISA to retire comfortably? Let’s take a look.
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.
Compund returns
The first thing to say is the earlier someone gets started on their investment journey, the better. Time in the market allows for exponential growth through the power of compounding, which can turn even modest long-term contributions into a substantial retirement fund.
Let’s say someone has £100 to invest each month in their Stocks and Shares ISA. If they can achieve a 6% average annual return, here’s what their nest egg could look like by the State Pension age of 68, according to the date at which they began investing:
| Age | Retirement pot (excluding broker fees) |
|---|---|
| 25 | £242,251 |
| 30 | £174,426 |
| 35 | £124,141 |
| 40 | £86,863 |
| 45 | £59,225 |
| 50 | £38,735 |
As you can see, the differences are vast, illustrating the enormous effect of compound gains. Starting at 25 instead of 30 leads to nearly £68,000 more by retirement, just for beginning five years earlier.
The difference is even more striking when comparing a start age of 25 to 40. That’s a gap of around £155,000, despite contributing the same £100 each month.
Yet this isn’t to say that someone who starts investing later on can’t build a decent retirement fund. Even someone in middle age could conceivably retire in comfort with the right investment strategy.
A £51k passive income
It’s important to say that there’s no guaranteed return by investing in shares, trusts and funds. But history shows us that stock markets can be extremely effective way to target long-term wealth.
For instance, despite bouts of recent volatility, the average annual return of the FTSE 100 and S&P 500 indices over the last decade are 6.4% and 12.9% respectively.
Based on these figures, a 40-year-old who can invest £500 each month equally in these indices stands a good chance of achieving a Stocks and Shares ISA worth £854,877 by the time they reach 68.
If they then invested this in 6%-yielding dividend shares, they’d have a healthy £51,293 passive income to live off.
A top fund
There are many ways that investors can seek to build retirement capital, of which this is just one example. But a fund like the HSBC S&P 500 (LSE:HSPX) could be a good option to consider given the excellent long-term returns of US stocks that I’ve described.
Index funds like these provide excellent diversification across hundreds of companies, helping investors capture a multitude of opportunities while also allowing them to spread risk.
This particular fund holds high-growth shares like semiconductor maker Nvidia, online retailer Amazon and social media specialist Meta. Defensive shares such as telecoms provider Verizon, drinks manufacturer Coca-Cola and healthcare company Johnson & Johnson also provide steel.
It’s a combination that could deliver a blend of healthy capital gains, dividend income and long-term resilience.
A ramping up of global trade tariffs could well impact future returns. But US shares have a proven record of bouncing back from economic crises, which makes an S&P 500 fund a solid opportunity to think about.
