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A second income is a game-changer in retirement. One of the most tax-efficient ways to build it is with a Stocks and Shares ISA. While ISAs don’t offer upfront relief like a Self-Invested Personal Pension (SIPP), all capital growth and dividend income is sheltered from taxes. This makes a huge long-term advantage.
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.
Every tax year, investors can put up to £20,000 into an ISA. That’s a decent allowance, but it still leaves the big question: how much is needed in the pot to draw a sizeable passive income of, say, £2,500 a month in retirement?
Retirement planning
One widely used yardstick is the 4% withdrawal rule. It suggests that withdrawing 4% of a portfolio annually should make the money last indefinitely. On that basis, £2.5k a month, or £30,000 a year, would require £750,000.
That’s a daunting figure, but not impossible. Over 25 years, investing just under £800 a month and generating an average annual return of 8% could hit the target. That falls to £525 a month if you can stay invested for 30 years.
NatWest shares have soared
One name that catches the eye right now is NatWest Group (LSE: NWG). The FTSE 100 bank’s share price has soared 60% over the last year and a huge 318% over five years (better still, all dividends are on top). That’s impressive, yet the valuation still looks reasonable, with a price-to-earnings ratio of just 10.2. A figure of 15 usually represents fair value.
NatWest is benefiting from two big factors: healthy profits across the banking sector and the government finally selling its last stake, meaning all decisions are now fully commercial. In half-year results on 25 July, operating profit jumped 18% to £3.6bn, beating forecasts. The bank also unveiled a £750m share buyback and hiked the dividend 58% to 9.5p per share.
Income seekers may like the yield too. While the trailing figure has now fallen below 4%, it’s forecast to reach 5.5% in 2025 and a mighty 6.16% in 2026.
FTSE 100: risk and reward
No stock is without risk. Banks have been rocked by regulatory issues in the past, from rate rigging to mis-selling. NatWest is also vulnerable to a slowing UK economy, while falling interest rates could squeeze margins. That’s why it makes sense to hold around 15 stocks across different sectors, so one setback doesn’t derail the whole plan.
For investors willing to give it time, dividend shares like NatWest can be a powerful way to build a second income. The miracle of compound returns works quietly in the background, and over decades it can make a dramatic difference.
Reaching a £750,000 ISA isn’t quick or easy, but with steady contributions and a focus on quality dividend payers, a £2,500 monthly income could be within reach. Even falling short should still mean a far higher second income than would come from doing nothing at all.
