I’d invest £50 a month in a Stocks and Shares ISA for passive income

Investing for passive income in a Stocks and Shares ISA could have significant tax and investment benefits, argues this Fool.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I am always looking for new ways to boost my passive income from investments. I believe investing in equities is one of the best ways to create a steady income.

Combined with the tax-efficient nature of a Stocks and Shares ISA, the strategy could be twice as effective. 

ISAs are a great tool to invest in the market because any income or capital gains earned on assets held within one of these wrappers are not liable for tax

This suggests I could generate a tax-free passive income by investing and saving in a Stocks and Shares ISA

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.

Stocks and Shares ISA investing

According to my calculations, I only need to invest £50 a month to generate a passive income from equities. A figure of £600 a year might not seem like much, but thanks to the power of compound interest, this could become a significant sum in the long run. 

According to my calculations, if I can achieve an average annual return of 10% on my money, I calculate I could have a nest egg worth £40,000 after 20 years of saving.

This is only a ballpark figure. I cannot assume I will generate a 10% return indefinitely.

Nevertheless, I believe it clearly illustrates the wealth-creating power of equities in the long run. If I were to increase my monthly deposit to £500, I think I could accrue a near £400,000 investment pot after two decades of saving. 

This is entirely compatible with a Stocks and Shares ISA as investors can deposit £20,000 a year into one of these investment accounts. This figure of £500 a month is only £6,000 a year.

Using the entire allowance of £20,000 a year with a 10% per annum return could produce a £1.3m investment pot within 20 years. 

Still, as I touched on above, success is not guaranteed with this approach. Equity markets can be pretty volatile. If they fell 50% in a single year, it could take me several years to recover from these losses. There is also no guarantee I will learn 10% per annum. The actual figure could be a lot more, or a lot less. There is no way of telling.

Passive income strategy 

Despite these challenges, I believe this strategy is one of the best ways to create a passive income. By investing £50 a month, I could build a nest egg worth £40,000 after 20 years. If I then switch from growth investing to income investing, I could earn a 7% per annum return on my money, based on current dividend yields.

Once again, this figure is only designed to illustrate the potential return available. There is no guarantee I will be able to invest in stocks yielding 7%.

But if I can, I could turn my investment lump sum of £40k into an annual passive income of nearly £3,000. This income would be tax-free if generated by assets in a Stocks and Shares ISA. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »