The contribution limit for Stocks and Shares ISAs is still £20,000 a year. But there’s a more interesting number that I’ve been focusing on: £7,953.
According to SharingPensions.co.uk, that’s the average annual income over-65s receive from annuities. Fair enough, but what about the rest of us?
The maths
An annuity means waving your money goodbye in exchange for regular payments. But there’s an alternative route to passive income that lets you keep the money.
That’s not the only important difference. Returns from annuities are taxable, whereas income from a Stocks and Shares ISA isn’t.
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.
That makes a real difference. For basic rate taxpayers, a Stocks and Shares ISA with a 6% dividend yield needs to be worth around £110,000 to return £7,953 a year.
Outside of an ISA, paying tax on that income takes the required portfolio size up to £132,550. And that means a lot in terms of how long it takes to get there.
The FTSE 100 average is around 3.4%, so investors aiming for this need to find above-average yields without falling into dividend traps. But I think it might be a realistic ambition.
Starting from scratch
Using the FTSE 100’s 20-year annualised total return of 6.4%, with dividends reinvested along the way, the road to £132,550 looks like this:
| Timeframe | Monthly investment | Total contributed |
|---|---|---|
| 20 years | £274 | £65,760 |
| 25 years | £180 | £54,000 |
| 30 years | £123 | £44,280 |
It’s well-known that compound interest is a powerful force. But the numbers really bring this out – an extra 10 years cuts the monthly outlay by more than half.
Returns are never guaranteed, even over decades. Other things being equal, however, the benefits of starting early can be huge.
What to buy?
Admiral (LSE:ADM) is a stock I like very much. I own the insurer in my portfolio and I keep a close eye on it when I’m looking to buy shares.
The headline dividend yield is around 5.7%. But investors who look carefully at the business will note something important.
From the 2026 interim payout, Admiral is replacing special dividends with share buybacks. This is partly because staff bonus schemes have been delinked from the dividend.
Total returns to shareholders should be unchanged – the firm still expects to distribute around 90% of post-tax profits. But some of it now arrives as a share count reduction rather than cash.
Risks and rewards
The obvious risk is inflation. When repairs and parts become more expensive, margins can erode on car or home policies that were priced months in advance.
Car insurance, however, is a short-tail business. Policies generally renew annually and claims settle quickly.
As a result, Admiral can reprice its entire book roughly once a year to adjust for rising costs. Compare that with life insurers, where incorrect assumptions can compound for decades.
The unique strength, however, is cost. The firm registered a 2025 combined ratio of 80.1% — while much of the industry sits near 100. That means Admiral keeps 20p of underwriting profit per £1 of premium, while rivals earn nearly nothing. That leaves room to absorb inflation or undercut competitors.
The bottom line
Nobody should buy a stock just because of the yield printed on the screen. Investing is about buying quality businesses at fair prices — and with a widening cost advantage, Admiral is worth looking at.
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Stephen Wright owns shares in Admiral.
