According to experts, those wanting a have a basic retirement need £852 more than the current (2026-2027 tax year) State Pension pays. For a moderate lifestyle, an extra £19,252 is required. And those seeking more financial freedom with a few added luxuries will require a total annual income of £43,900. That’s £31,352 more than the UK government pays to pensioners.
To help try and cover this shortfall, I think it’s worth considering investing in the stock market via a Stocks and Shares ISA. And with a successful stock-picking strategy, I reckon it’s possible to produce a healthy income stream for later in life. Let me explain.
How could an ISA grow?
If someone built an ISA worth £627,040 and then used it to buy a collection of dividend shares paying 5%, it would be sufficient to produce the £31,352 needed every year which, when combined with the State Pension, would help provide a financially comfortable old age.
Admittedly, this is a sizeable investment pot.But someone investing £266.20 a month for 25 years, achieving an annual return of 13.2%, could get very close (£627,032). However, is a return of 13.2% realistic?
Biggest and best?
As the table below shows, the average annual increase in the share prices of the FTSE 100’s five largest companies since May 2021 is 13.2%. I’ve deliberately excluded Rolls-Royce Holdings as its post-pandemic recovery has been nothing short of remarkable and heavily distorts the average.
| Stock | 5-year share price change (%) | Market cap (£bn) |
|---|---|---|
| HSBC | +25.8 | 229 |
| AstraZeneca | +13.1 | 216 |
| Shell | +19.5 | 184 |
| British American Tobacco | +9.4 | 94 |
| Unilever | -1.6 | 93 |
| Average | +13.2 | 163 |
Had the dividends received been reinvested, the return would have been even higher.
Of course, history might not be repeated but for those who are prepared to take a long-term view, I think the stock market is the best way to try and accumulate significant wealth.
Going up in smoke?
One of the stocks in the table is of particularly interest because, over the past five years, not only has it delivered over 9% annual share price growth but it’s also paid a healthy dividend.
Thanks to its huge margin and strong cash flows, British American Tobacco (LSE:BATS) is presently (3 May) yielding an impressive 5.7%.
This would produce an annual income of £35,741 on an ISA worth £627,032. Of course, it wouldn’t be sensible to own just one stock, especially given that dividends are never guaranteed, but this example highlights the potential returns available from high-yielding UK shares.
Although I’m impressed by British American Tobacco’s dividend history – it’s raised its payout every year for over a quarter of a century – I’m not convinced it will be able to continue doing this.
Traditional cigarettes are slowly on their way out and I doubt whether the new generation of alternatives will be as profitable as their predecessors. The group’s also borrowed heavily to help fund its move away from conventional tobacco products.
I should explain that I’m looking several years ahead here. In 2025, the group reported year-on-year revenue growth of 2.1% (excluding currency movements) and a 0.7% increase in adjusted earnings per share. On this basis, I don’t see any immediate threat to its payout.
But I’m a long-term investor, which is why I believe there are plenty of better income opportunities to consider elsewhere. Indeed, seven of the FTSE 100 members are currently yielding 6% or more. This could be a good starting point for further research.
