A Stocks and Shares Allowance ISA is a great way to build up a gigantic pot of money for retirement. This is an even better method of generating passive income that will allow us to finance the last years of our lives.

Money invested within your tax-free allowance is free from capital gains tax (CGT) and income tax.

This means we don’t have to pay a penny in CGT to HMRC when the value of our selected shares increases. What’s more, we can reinvest all of the company’s dividends received directly back into our portfolio without paying a penny of tax on them.

FTSE 100 shares are the highest-yielding companies

When an investor retires, they can withdraw lump sums or regular dividends completely tax-free. This makes it easier to manage your overall tax obligations. By combining pension and ISA withdrawals, an investor can avoid falling into a higher tax bracket. These tax benefits last for life.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Let’s assume an investor’s target retirement income is £40,000 a year. If they receive £12,000 from their state pension and a further £12,000 from their workplace pension, they will still be £16,000 miniature. So how many stocks and shares ISA would they need to generate this?

The answer partly depends on the type of stock they buy. Let’s say they start with FTSE100 bank HSBC Holding companies (LSE: HSBA).

Today, the bank’s dividend rate is 5.99%. This is an excellent yield, well above the FTSE 100 average of 3.5%. Although dividends are not guaranteed, companies must generate sufficient profits to finance them.

HSBC has been on my own shopping list for months. The Asia-focused bank looks impressive, trading at just 8.9 times trailing earnings. That’s affordable for a bank that grew profits 10% to $8.5 billion in the third quarter, beating analysts’ expectations of $7.6 billion.

The board rewarded shareholders with $3 billion per quarter in share buybacks.

No stock is risk-free. New CEO Georges Elhedery must navigate U.S.-China tensions, deal with a planned split between its eastern and western divisions and maintain growth as falling interest rates squeeze margins. Nevertheless, I am still willing to buy.

HSBC’s share price may also rise

Investing in a dozen different FTSE 100 shares would spread the risk. If these shares could generate an average return of 6%, an investor would need £266,667 in their Stocks and Shares ISA to generate £16,000 a year.

This looks like a tough task, but it is doable given the time. If you invested £300 every month and had an average total return of 8% a year, it would take just under 25 years. If this monthly total is increased each year to keep pace with inflation, the goal can be achieved more quickly.

Moreover, dividend income should enhance over time, as most companies try to enhance shareholder returns every year whenever possible. There are no guarantees. The portfolio may bring in or less than expected. But having a goal to work towards is a great start.