How to get a tax-free ISA income worth double the £12,547 State Pension

If you retire purely on the new State Pension, one thing is certain. You’ll have a tough time of it in retirement. It’s currently worth just £12,547.60 a year. If you’re single, the bare minimum retirement lifestyle requires £13,400 a year. But that’s just for the basics (and assumes you have no rent or mortgage). To be comfortable, you need £43,900, according to the Retirement Living Standards survey.

This makes it essential to save all you can, and I think the Stocks and Shares ISA is a brilliant way to do it. While a Cash ISA is fine for short-term savings, history shows that over the years, equities do far better.

How do I build wealth on the stock market?

A popular option for long-term Stocks and Shares ISA investors is to create a portfolio of FTSE 100 stocks, offering both share price growth and dividend income. You can reinvest those dividends while you’re still working, then draw them as income after you retire. Just remember, all returns in an ISA are entirely free of tax, for life. It’s a brilliant 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.

Now let’s say you fancy generating an income worth twice the current State Pension. That’s £25,094 a year. So how much capital do you need to generate that income? The answer depends on your portfolio’s yield.

• 4% – £627,350
• 5% – £501,880
• 6% – £418,233
• 7% – £358,486

That’s a big difference in those numbers, which is why I’m targeting the more generous FTSE 100 high yielders. Insurer Standard Life (LSE: SDLF), until recently known as Phoenix Group, is one of them.

Today, it offers a bumper trading yield of 6.92%. In fact, when I brought it two years ago, the yield was nudging 10%. Yet Standard Life hasn’t cut its dividend. In fact, the board has hiked shareholder payouts every year for a decade. It aims to continue its progressive policy, albeit at the modest pace of 2% a year.

The yield has fallen because the shares have done so well. They’ve climbed 24% in the last year, and 60% over two. Investors are getting bags of growth as well as income.

There’s a fair chance the Standard Life share price may slow after such a strong run. Growth often comes in fits and bursts. Also, with more than £300bn of assets under management, Standard Life could get hit by a wider stock market crash, if we get one. It also operates in a competitive sector, and has to keep battling for new lines of business to keep the cash flowing.

However, with a long-term view, I’m optimistic it will give me a steady stream of dividends. With retirement 10 years away, I’m re-investing every one. After I stop working, I’ll draw them as income. Entirely free of tax.

I think Standard Life shares are well worth considering today, but this isn’t the only FTSE 100 dividend stock I own. There are other terrific high-yielders out there and I suggest you look for them too. Better invest today than struggle on the State Pension later.

Should you invest £5,000 in Standard Life right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Standard Life made the list?

Harvey Jones owns shares in Standard Life