Nobody wants to live purely on the State Pension when they retire, so building a second income stream is vital. Investing in a Stocks and Shares ISA is a great way of doing that, because all your returns will be free of income tax, dividend tax, and capital gains tax for life.
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.
Right now, a popular option for long-term ISA investors is to build a diversified spread of FTSE 100 shares offering both dividend income and growth. The idea is to reinvest those dividends while working, then draw them as income in retirement.
How big should my retirement pot be?
Let’s say an investor is targeting an annual income of £25,000 a year. That works out as £2,083 a month. How much do you need in your Stocks and Shares ISA to generate that? It all depends on the yield.
- At a 4% yield, an investor would need roughly £625,000.
- At 5%, the required sum falls to around £500,000.
- At 6%, the figure drops again to roughly £416,667.
Higher yields reduce the amount of capital required, but that doesn’t mean you should simply chase the biggest dividends you can find. I’d suggest building a balanced spread of around a dozen UK blue-chips, targeting those with strong cash generation and a decent record of rewarding shareholders.
Is British American Tobacco the one?
British American Tobacco (LSE: BATS) is one of the market’s most impressive income shares. Tobacco stocks have been written off for years, yet they continue to churn out hefty profits and high-and-rising dividends.
Despite falling smoking rates, British American Tobacco still sold more than 465bn cigarette ‘sticks’ globally in 2025. Sales volumes fell 8%, although demand for alternative nicotine products, such as vapes and heated tobacco, continues to improve.
Recent revenues have been remarkably resilient:
- 2025 — £25.61bn
- 2024 — £25.87bn
- 2023 — £27.28bn
- 2022 — £27.66bn
- 2021 — £25.68bn
Although primarily seen as an income play, the British American Tobacco share price has done well lately. It’s up 63% over five years and 23% over 12 months.
Momentum has slowed lately amid concerns that the renewed cost-of-living crisis could force even the most committed smokers to cut back. Tuesday’s (2 June) trading update was a bit patchy. Management expects cigarette volumes to decline by 2.5% this year, slightly worse than previously forecast. That’s despite growing demand for vapes, heated tobacco and oral nicotine pouches.The board still expects total revenues to climb by 3%-5% across 2026.
What are the investment risks?
There are risks. The group’s powerful brands and pricing strength continue to support earnings, but regulators remain hostile and vaping rules could tighten if health concerns grow. British American Tobacco recentlly took an $8bn hit from a long-running class action lawsuit in Canada. We can’t rule out more.
Even so, investors prepared to consider the tobacco stock for the long term should still be well rewarded. British American Tobacco’s valuation isn’t too excessive either. The price-to-earnings ratio is 12.2 and the trailing yield a chunky 5.6%. I don’t personally buy tobacco stocks, but when I look at this one, I wish I did.
Should you invest £5,000 in British American Tobacco P.l.c. 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 British American Tobacco P.l.c. made the list?
Harvey Jones does not hold any positions in the companies mentioned.
