What size ISA do you need for £250-a-week retirement income?

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Every UK adult now has a brand new ISA allowance, allowing them to save or invest up to £20,000 in the 2026/27 tax year.

There are two main ways to tuck money away in the tax-free wrapper. The first is through a Cash ISA, which is effectively just a savings account, but with no tax on the interest. The second is via a Stocks and Shares ISA. At The Motley Fool, this is the one we favour. That’s because history shows over the longer run, equities deliver a vastly superior return to cash deposits.

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.

Cash or equities, there’s only one winner

New research from Investing Insiders shows that in the last 10 years, the average Stocks and Shares ISA returned on average 9.5% a year, against just 4% from Cash ISAs.

My own figures show that if somebody had £10,000 in a Stocks and Shares ISA, and invested another £5,000 a year for 10 years, they’d have £109,975 at the end of it. By contrast, in a Cash ISA they’d have just £77,234.

The performance gap widens over time. In cash, they’d have £176,757 after 20 years. That’s less than half the £357,735 they’d get from shares (assuming those growth figures hold).

Cash ISAs are a great home for short-term savings, but for long-term wealth, the Stocks and Shares ISA is superior. So how big a pot does an investor need to generate income of £250 a week, which adds up to £13,000 a year? There’s a simple way of calculating this, known as the 4% rule. This says if you withdraw that percentage of your portfolio each year, your capital should never run dry. Using that, our investor would need £325,000.

However, if they invested in a spread of dividend shares with an average yield of 5% a year, and took that as their income, they’d need just £260,000.

Land Securities has a high yield

It’s actually possible to get a much higher yield than 5%. Real estate investment trust Land Securities Group (LSE: LAND) yields an impressive 7% a year. REITs come with tax advantages, as they pay no corporate tax provided they distribute at least 90% of taxable income to shareholders.

Land Securities, or Landsec, as it’s often called, runs a commercial property portfolio of offices, shopping centres and retail parks. While it’s an established FTSE 100 blue chip, it has had a tough run lately, along with the rest of the REIT sector.

The pandemic-era working-from-home trend hit office demand while the subsequent cost-of-living crisis hit bricks-and-mortar retail (as did e-commerce). Higher interest rates pushed up borrowing costs, and made it harder to dispose of properties at a profit.

Things looked more promising at the start of the year, as investors anticipated falling interest rates, but the Iran war has put a spanner in the works. Landsec still looks good value with a price-to-earnings ratio of 11.6 and is worth considering with a long-term view. Investors should only buy as part of a wider portfolio of shares to spread risk.

Equities may be volatile in the short term, but that’s the price investors pay for higher returns. And with luck, a higher retirement income too.

The post What size ISA do you need for £250-a-week retirement income? appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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