Building a second income stream for retirement is a common investment goal and investing in a Stocks and Shares ISA is a great way to do it. But how much do people need to tuck away?
To achieve a comfortable retirement a single person needs £43,900 a year (see table), according to the Retirement Living Standards survey. Let’s assume they get the full new State Pension, currently worth £12,547 a year. They’ll still need to generate another £31,353, under their own steam. It’s made a bit easier by the fact that in an ISA that money will be tax-free.
| Lifestyle target | Single person | Couple |
| Minimum | £ 13,400 | £ 21,500 |
| Moderate | £ 31,700 | £ 43,900 |
| Comfortable | £ 43,900 | £ 60,600 |
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.
How much do you need to retire in comfort?
A popular way of building wealth is to invest in a spread of FTSE 100 shares offering both growth and dividend income. So what do you need to earn £31,353, which works out as £2,613 a month?
The answer depends on your portfolio’s yield. It’s possible to generate an average income of 5% a year from a spread of UK blue-chips. At that rate, the investor would need a Stocks and Shares ISA worth £627,060. If they target higher-income shares and get a 6% yield, the target falls to £522,550.
Those are daunting numbers. But by investing regularly in a spread of shares, and reinvesting all dividends while still working, it’s possible to build up some pretty meaty sums.
One FTSE 100 stock investors could consider is pensions and insurance specialist Standard Life (LSE: SDLF) — until recently known as Phoenix Life. Today, it offers a stunning trailing yield of 7.25%. Not only that, but the shares have climbed 25% over the last year. That’s a total return of 32.25%. It means a £10,000 investment just one year ago would be worth £13,225 today.
I wouldn’t expect gains like that every year. But a chunky dividend combined with bursts of share price growth could still deliver attractive long-term returns.
Standard Life needs to keep generating new sources of cash to fund its dividends. It recently made another step in that direction by purchasing Aegon UK’s pension business. The deal expands its customer base to roughly 16m people. The group now has £480bn worth of assets under administration.
Are the shares decent value?
That should give Standard Life more scale, while adding new customers to offset the gradual decline in its older legacy accounts. No business is perfect though. Competition across pensions and savings remains fierce. Standard Life’s shares aren’t super-cheap either. After the recent rally, the forward price-to-earnings ratio now sits at 17.5. That’s slightly over the index average.
The dividend looks solid, as the board has increased it every year since 2016. It’s aiming to lift it by a modest 2% annually in future. Remember, no dividend is guaranteed.
Millions of Britons need pensions, savings products and retirement advice, so there’s a big opportunity here. I hold Standard Life in my own SIPP and think it’s well worth considering for investors keen to fund a comfortable retirement and cut their tax bills too.
