A £1 million Stocks and Shares ISA sounds like an almost impossible amount of money.

For most people, it probably brings to mind lottery winners, business owners or people earning enormous salaries. But a £1 million ISA can also be built gradually by an ordinary investor who consistently uses their annual allowance, remains invested and gives compounding enough time to work.

The really interesting question is not whether £1 million sounds impressive or looks good in your Trading 212 account…

It is what that money could actually do for you.

Could it replace your salary?

Reaching £1 million would not mean withdrawing the entire amount and slowly running it down.

Ideally, most of the portfolio would remain invested. You would then take a sustainable income from it through dividends, interest and the occasional sale of investments.

Using some simple withdrawal rates, a £1 million ISA could potentially provide:

Those figures would not be guaranteed. Investment returns vary, markets fall and inflation gradually increases the cost of living. However, they give us a reasonable starting point.

A withdrawal of £40,000 from an ISA is also very different from earning a £40,000 salary.

Income and withdrawals from a Stocks and Shares ISA are free from UK Income Tax and Capital Gains Tax. Unlike pension income, the money does not get added to your taxable earnings.

That means £40,000 withdrawn from an ISA is £40,000 available to spend.

A common misconception is that an income portfolio must generate enough dividends to cover all your spending.

That can lead investors towards funds or companies offering unusually high yields. Unfortunately, the highest yield is not necessarily the safest income.

Dividends can be reduced, companies can struggle and high-yielding investments may deliver weak capital growth.

I would be more interested in the portfolio’s total return.

If a diversified portfolio produced a combination of capital growth and dividends, I could withdraw some of the income and sell a small number of units when required.

Selling investments is not automatically a sign that the strategy has failed. It is simply another way of turning accumulated wealth into spendable money.

This is where the answer becomes less certain.

A fixed 4% withdrawal would provide £40,000 in the first year, but taking the same amount regardless of market conditions could place pressure on the portfolio during a prolonged downturn.

The greatest danger comes when markets fall heavily during the first few years of retirement. You may be forced to sell more investments while prices are depressed, leaving fewer units available to participate in the eventual recovery.

I would therefore want some flexibility.

During strong years, I might increase withdrawals slightly. During a serious market fall, I could reduce discretionary spending, use a cash reserve or temporarily withdraw less.

A flexible approach gives the portfolio a better chance of lasting than blindly increasing withdrawals every year. Vanguard similarly describes percentage-based withdrawals as producing an income that rises and falls with portfolio performance.

For me, an ISA would only be one part of the picture.

I also expect to have pension income. Other people may eventually receive the State Pension, workplace pensions, rental income or part-time earnings.

That means a £1 million ISA may not need to replace every penny of someone’s previous salary.

It might only need to cover the gap.

Even a 3% withdrawal of £30,000, combined with pension income, could create a very comfortable lifestyle—particularly if the mortgage has been cleared and the costs associated with working have disappeared.

The current annual ISA allowance is £20,000. Money already held inside the account can remain invested on a tax-free basis, even after the tax year ends.

Nobody reaches £1 million by depositing £1 million on day one.

It is normally built through years of contributions, reinvested returns and patience.

That is why I see my ISA as far more than a savings account. Every contribution buys a small piece of my future income.

A £1 million ISA might not replace the salary of a highly paid executive. But it could realistically provide £30,000 to £40,000 a year of tax-free spending power, supported by a portfolio that remains invested.

To me, that is the real purpose of compounding.

It is not simply about building a large number on a screen that I become too frightened to spend. It is about eventually reaching the point where work becomes a choice rather than a financial necessity—and where the money I have patiently built gives me genuine financial freedom.

The Compounder
Long-term investing made simple.

The Compounder is for financial education and commentary only. I am not authorised or regulated by the Financial Conduct Authority and I do not provide financial advice, investment advice, or personal recommendations. Nothing published here should be taken as a recommendation to buy, sell, hold or switch any investment, fund, pension, ISA, crypto asset or financial product. Always do your own research and consider speaking to an FCA-authorised financial adviser if you are unsure.