Early retirement isn’t everyone’s sole focus in life, but a lot of us would like to retire before we reach the State Pension age. And a Stocks and Shares ISA can be a big help in trying to do this.
Not having to worry about capital gains taxes is very valuable for building wealth. And avoiding taxes on dividends is great for when the time comes to use a portfolio to generate income.
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.
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Retirement income
According to the Pensions and Lifetime Savings Association (PLSA), a couple in the UK needs a combined income of £43,100 per year to retire comfortably. For a single person, it’s £31,300.
Achieving either of those figures from a Stocks and Shares ISA isn’t easy. With where the stock market is right now, I think a diversified portfolio might generate around 5% per year.
That means around £626,000 in investments is what it would take for a single person to retire and live comfortably today. But the contribution limit each year for an ISA is £20,000.
Opening a Stocks and Shares ISA and immediately earning enough to retire comfortably is unrealistic (without transferring another ISA). But there are reasons for investors to be positive.
Compounding
That seems fairly gloomy, but there are reasons for optimism. The most obvious is that the cash someone invests can earn a return each year and bring the target closer.
Investing £20,000 per year – which isn’t to be taken lightly – at an average of 5% per year results in a portfolio worth £626,000 within 20 years. That could shorten the time to retirement considerably.
There is, however, a catch. Inflation is a constant risk and as the cost of living keeps going up, the amount needed to retire comfortably in the future may well be higher than it is now.
Despite this, a Stocks and Shares ISA can still be a powerful asset for someone looking to retire early. But the obvious question is what they consider investing in to try and reach that goal.
An under-the-radar opportunity?
One stock that probably doesn’t get the attention it deserves is Macfarlane (LSE:MACF). This might be because it’s a packaging firm and even I can’t pretend cardboard boxes are interesting.
Given this, investors might be surprised to find the market is actually relatively crowded. And the company is up against some much bigger competitors, which creates a risk.
Macfarlane, however, finds its niche in more bespoke packaging solutions for objects that are fragile or valuable. And this creates much higher barriers to entry for potential competitors.
Technical knowledge about materials and close relationships with its customers are advantages other companies don’t have. And these have resulted in growing margins over the last 10 years.
Dividend growth
Right now, shares in Macfarlane come with a dividend 3.5% yield. And the company recently announced an increase in its shareholder distribution, which I think is encouraging.
I’d like to reach retirement before I get to the State Pension Age in 2056. But there’s a long way to go until that’s realistic for me.
Shares like Macfarlane, though, are what I want to be invested in as I try to get there. And the tax advantages of a Stocks and Shares ISA could help me along even more.
