How to use a Stocks and Shares ISA to retire early

The tax savings benefits of the Stocks and Shares ISA are often talked about. But what’s less commonly discussed is the fact that, unlike with pensions, money can be withdrawn from these ISAs at any time.

This feature shouldn’t be overlooked. By building up a large amount of wealth within a Stocks and Shares ISA could potentially lead to retire early.

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.

Retirement flexibility

The age at which we can access our personal pensions (eg SIPPs) is currently 55. But in the years ahead, the age is set to rise to 57 in 2028 and, potentially, 58 in 2034.

But what if we don’t want to wait until the age of 57 or 58 to retire? Well, this is where a Stocks and Shares ISA could help.

Building up a stack of wealth within an ISA can potentially retire at whatever age they want to, whether that’s 55, 50, or earlier. That’s because the money can be accessed any time.

Building up wealth

Now, building up a substantial amount of wealth within an ISA account is easier said than done. This is due to the fact that the annual allowance is only £20,000.

But there are two strategies that can make all the difference. The first is starting to save into an ISA early. Contributing to an ISA for 15-20 years, for example, is likely to build impressive wealth over time.

The second is investing in the stock market. Over the long term, it tends to provide investors with returns of around 7-10% a year. So it can grow wealth significantly over the long run.

Putting these two strategies together, I calculate that if an investor was to contribute £1,000 per month (£12,000 per year) to an ISA from the age of 35, and they generated a return of 8% per year through the stock market, they could have built over £550,000 by 55.

This should be more than enough to last until their pension kicks in a few years later.

Investing properly

It’s worth noting that to generate these kinds of returns from the stock market, a decent investment strategy is needed. Owning one or two shares isn’t going to cut it.

The key to generating strong returns from the stock market is investing in at least 15-20 high-quality companies. These should be in a range of industries including technology, healthcare, financials, and consumer goods.

By diversifying capital across different companies and sectors like this, an investor can give themselves a good chance of achieving returns that are in line with, or even above, the market.

How can an investor find high-quality companies? Well, some things to look for include a strong competitive advantage, plenty of growth potential, a high level of profitability, and a reasonable valuation.

Looking for more stock market investing tips? You can find plenty right here at The Motley Fool.