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A Stocks and Shares ISA is a simple, flexible and tax-efficient way to build a long-term passive income for retirement. All capital growth and dividends inside it are tax-free, and withdrawals don’t attract income tax either.
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.
Many investors plan to fund their retirement second income from a portfolio of FTSE 100 shares. That’s what I’m doing. It’s an achievable goal, but takes time, patience and steady contributions.
Picking the pension target
Let’s start with the maths, based on a target retirement income target of £1,750 a month, or £21,000 a year. If someone followed the 4% ‘safe withdrawal’ rule, and only took that percentage of their pot each year as income, the capital should last indefinitely. On that basis, the target portfolio size would be £525,000.
That’s a big figure, but compound returns can make it possible. Someone investing £440 a month into a diversified ISA portfolio earning an average annual return of 7% could hit roughly £533,000 after 30 years. Even smaller sums, started earlier, can compound and grow over time.
The key’s staying consistent, reinvesting dividends, and avoiding the temptation to pull money out during market dips. That’s easier said than done, but patient investors tend to come out on top.
Balancing growth and income
A retirement-focused ISA shouldn’t rely on a single stock or sector. A portfolio built around 15-20 blue-chip shares should offer a decent mix of stability and dividend income.
BP (LSE: BP) is the kind of share that might feature. It’s a long-standing FTSE 100 heavyweight, and plenty of pensioners already depend on its dividends to supplement their income. However, BP’s track record reminds investors why diversification matters.
The oil giant’s share price dipped 5% last week on fears of oversupply, and is up just 3.6% over the year. On a more positive note, it’s soared 97% over five years, with dividends on top. There’s no guarantee it will repeat that performance though.
BP’s dividend history has been uneven, with payouts paused or cut during tougher periods such as the pandemic, before resuming at lower levels.
Still, the yield today sits comfortably above the FTSE 100 average, and quarterly share buybacks continue to support returns. Its trailing price-to-earnings ratio looks inflated at more than 200, but the forward P/E of around 14.5 is far more appealing.
Holding nerve through volatility
BP’s profits tend to rise and fall with the price of oil. Recent results showed weaker quarterly earnings but enough cash flow to fund higher dividends and buybacks. Net debt remains high at around $30bn, but the company’s vast global operations and £190bn annual revenues give it breathing room.
I’d see BP as one to consider for an income portfolio, but not to rely on entirely. Oil markets can change direction fast, and the shift towards renewables remains unpredictable, so it may be wise to diversify into other stocks and sectors.
Building a retirement portfolio inside an ISA takes time, discipline and belief in the long game. But with regular investing, reinvested dividends and a few solid income shares like BP, it’s possible to reach that £525,000 target. Or maybe beat it.
