The full new State Pension now pays £12,547 a year. Yet, with a comfortable retirement estimated to cost roughly £43,900 annually, the State provides less than a third of what many retirees may need. So how much passive income would an ISA need to generate to make up the difference?
Crunching the numbers
The size of the retirement gap matters — but so does how an investor plans to fill it.
To generate the roughly £31,353 needed on top of the full State Pension, the required portfolio size varies considerably depending on the level of income produced:
- £627,060 at a 5% yield
- £522,550 at a 6% yield
- £447,900 at a 7% yield
That difference is striking. A seemingly small change in yield can reduce the capital required by well over £100,000.
But this is where retirement planning becomes more nuanced.
Higher yields may appear to offer a shortcut, yet they can sometimes come with trade-offs. Income that looks generous on paper may reflect slower growth, greater economic sensitivity, or dividends that prove difficult to maintain through weaker periods.
For me, that highlights an important point. Retirement income is not simply a numbers exercise centred on maximising yield. The real objective is building a portfolio capable of producing reliable income without relying on unsustainably high payouts.
Viewed that way, the State Pension becomes less of a complete retirement solution and more of an income foundation — one that can be strengthened over time through carefully selected investments and reinvested income.
That’s where stock selection becomes critical.
Income power
For investors trying to build meaningful passive income alongside the State Pension, HSBC (LSE: HSBA) is one stock I think deserves consideration.
At first glance, the appeal is obvious. The bank currently offers a dividend yield of roughly 4.2%, supported by significant earnings and strong capital returns through both dividends and share buybacks.
But what matters is not simply the headline yield.
Income stocks work best when dividends are backed by durable earnings power, and that is where the HSBC investment case becomes more interesting.
Recent results showed revenues rising around 6%, helped by stronger wealth management activity and higher net interest income. While credit losses increased and understandably unsettled investors, management maintained medium-term profitability targets, including a return on tangible equity of 17% through to 2028.
That matters because banks operate differently from many traditional income stocks. Their ability to sustain shareholder payouts depends heavily on the broader interest rate environment.
For much of the previous decade, ultra-low rates compressed profitability across the sector. Today, that backdrop looks very different. Sticky inflation, elevated debt levels, and geopolitical uncertainty all suggest a return to near-zero rates is unlikely any time soon.
If that proves correct, HSBC could continue benefiting from structurally stronger net interest income than investors became accustomed to during the post-financial crisis period.
Of course, risks remain. Rising credit losses are an early warning signal that economic conditions may be becoming more challenging, and banks are inherently more cyclical than utilities or consumer staples.
Even so, for investors focused on building passive income over time, HSBC highlights how income power and earnings resilience can sometimes matter more than chasing the highest yield alone.
Should you invest £5,000 in HSBC Holdings right now?
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Andrew Mackie owns shares in HSBC.
