A stocks and shares ISA is in my view the best way to target significant passive income in retirement. Not only does it harness the wealth building power of the stock market, but capital gains and dividend taxes are excluded, while withdrawals are also protected from HMRC. Every penny earned by the investor is his alone.

The true benefit of these tax-efficient instruments becomes clear over time, with tax savings compounded and profits reinvested to accelerate portfolio growth. By the time someone reaches retirement age, they can find themselves with a significant amount of cash that provides a regular income.

The question is, how big would an ISA need to be to generate a £3,000 second income by 2051?

Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, and does not constitute, any form of tax advice.

Income planning

The monthly income of £3,000 is £36,000 per year. With the costs of living and social care rising, and questions rising about the sustainability of state pensions, this is a good amount to target, in my opinion.

What’s the best way to earn retirement income from an ISA though? Some people like to purchase an annuity with all or some of their nest egg. Withdrawing a percentage of the portfolio in cash is another popular option.

My own plan is to invest in high-yielding stocks. In theory, it provides room for further capital growth while at the same time providing a sustainable passive income stream. If someone chose this route and invested their money in shares with a 7% return, they would need a stocks and shares ISA worth £515,000.

Building wealth

At first glance, this may seem like a big mountain to climb. But for someone looking to build that between now and 2051, history shows it’s a very achievable goal. The compound effect over 25 years, combined with the significant tax savings in the tax code and stock market returns, can be enormous.

Let’s say we have a 40-year-old person who starts investing £500 a month in stocks. They could have accessed the magical £515,000 retirement fund by the time they reach 65 if they could achieve an average annual return of 8.5%.

Since long-term investors tend to enjoy an annual return of between 8% and 10%, this is a very realistic goal to aim for.

One of the best FTSE stocks

Building a diversified portfolio of individual stocks rather than purchasing an index tracker can bring this goal closer. One I think deserves serious consideration today is Games Workshop (LSE:GAW).

The miniatures and wargaming products they make and sell are not to everyone’s taste. But it comes back FTSE 100 index The delivery of stocks over the years is exactly what all investors crave.

Over five years, it generated an average annual return of 16.4%, accumulating stock price gains and dividends.

Can Games Workshop stock continue to perform? I’m optimistic they can. Rising competition, US tariffs pose a threat. But the company’s leading position in the rapidly growing fantasy wargaming market creates huge earnings opportunities.

It is also working to ramp up its licensing War hammer IP to increase royalty revenue and Introducing its products to new generations of enthusiasts.

However, they face risks, which is why building a diversified basket of different stocks is so important. Over the long term, a well-constructed portfolio can provide fantastic passive income, with tax-free ISA returns providing an extra boost.