Right now, UK shares trade at a huge discount to their US and European peers when comparing earnings.
An estimate by Liberum put the discount at 30% against US stocks and 25% against European ones.
Why is this? Well, there’s no one clear cause, although some experts think the uncertainty since Brexit has played a major role.
But the good news is that now might be a rare opportunity for me to buy UK shares to build wealth and create a passive income for myself.
Here are the three steps I’d take to try and turn £100 a month into a £12,208 yearly passive income.
Saving isn’t enough
Firstly, the success of my investments i slinked to the amount I can save. The more the better, of course.
But saving on its own isn’t enough. Even over 30 years of regular saving, the £100 a month would only build to a cash sum of £36,000.
| £100 a month | |
| 1 year | £1,200 |
| 5 years | £6,000 |
| 10 years | £12,000 |
| 20 years | £24,000 |
| 30 years | £36,000 |
At a 4% yearly withdrawal, that’s only £1,440 passive income. Not much at all.
What I’d do instead is invest those savings into UK shares to target a juicy return.
Investing in UK shares
My second step is to invest in quality, large UK companies. Firms in the FTSE 350 have returned around 8-10% on average for decades.
But I think I could go one better than that by taking advantage of discounted UK shares.
If UK shares catch up (which isn’t not guaranteed) I can aim for a higher 12% return that makes a huge difference over time. I would also be doing research to make sure I pick the best companies I can to increase that return as much as possible.
Of course, this does come with more risk as I can end up getting a lower return or even losing money.
No tax
Thirdly, I must take advantage of tax-free accounts like a Stocks and Shares ISA or a SIPP. These accounts provide UK residents with a way to invest in companies without losing a cut of the returns to tax.
An ISA has an upper limit of £20,000 per year, but that’s around £1,600 a month. That’s plenty more than the £100 a month I want to save and means I can invest more over time if I earn a higher salary in the future.
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.
A £305,201 total
So putting this together, here’s what £100 a month in UK shares could turn into.
| £100 a month | |||
| 0% | 6% | 12% | |
| 1 year | £1,200 | £1,234 | £1,265 |
| 5 years | £6,000 | £6,949 | £8,034 |
| 10 years | £12,000 | £16,247 | £22.193 |
| 20 years | £24,000 | £45,344 | £91,121 |
| 30 years | £36,000 | £97,451 | £305,201 |
That final figure of £305,201 can be withdrawn at a 4% rate to give me £12,208 passive income over a year. That’s over £1,000 a month I could use for financial security, to top up a pension or to help me retire earlier.
A 4% withdrawal rate is generally considered safe too. This means I could withdraw and still keep the original sum intact as a rainy day fund, or something to leave behind for loved ones as well.
