How much do you need in a Stocks and Shares ISA to get a £500 monthly pension?

Investors have just two weeks left to contribute to this year’s Stocks and Shares ISA grant. So there is no time to lose.

Many will have been deterred by recent stock market volatility. As the war in Iran continues, it seems like a dangerous time to buy equities. In The Motley Foolwe take a different view. History shows that markets always bounce. The best time to buy stocks is when prices are falling, as they are usually cheap, and dividend yields are at their highest. They are willing to hold for years, however, to give markets enough time to recover.

The FTSE 100 is flat

Short-term volatility is the price investors pay for long-term outperformance. I FTSE 100 it’s actually up about 20% this time last year, with gains on top. Despite recent concerns, investors are comfortably ahead.

With the 5th ISA deadline fast approaching, there is no time to waste. But a Shares and Dividends ISA is not just a great way to generate share price growth – it can offer investors pockets of income, from company shares. So how long will investors need to generate a £500 tax-free monthly income from their ISA?

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

That adds up to £6,000 a year. Now suppose their portfolio produces an average yield of 5%. To reach that £6k target, they will need £120,000. That may sound difficult, but investors can get there by taking out small amounts over a long period of time. Time is an investor’s best friend.

Let’s assume our investor is 30 years from retirement, and they build an equal portfolio of each FTSE 100 and FTSE 250 shares yield an average annual return of 7%.

If they withdraw just £100 a month, or £1,200 a year, they will end up with £121,287. Personally, I would suggest they invest a lot more than that, building a bigger retirement pot.

However, if they only have 20 years to retire, they will need to increase their monthly contribution to £250. Obviously, the earlier investors start, the better. But which stocks can you buy?

British American Tobacco shares are soaring

Finally, investors should aim for a balanced portfolio of at least twelve stocks. For those who enjoy investing in cigar makers, British American cigars (LSE: BATS) would be a good place to start.

FTSE 100 stocks have a good track record of long-term growth and earnings. Unsurprisingly, dividends have increased every year this millennium. British American Tobacco’s share price has risen a staggering 42% in the past year, and 95% in two years. It paid a dividend of 5.4%.

Tobacco stocks are considered defensive, as people continue to smoke throughout the economic cycle. Stocks have held up during the Iran conflict, at least so far. There are long-term risks, as smoking kills, and regulators are always looking to tighten up.

But a balanced portfolio of shares like these is an excellent way to generate a high and growing retirement income, tax-free within a Stocks and Shares ISA. And there are many more blue-chips today.