How I’d target £10,000 in passive income per year

Ten grand in passive income could make a very nice addition to my retirement years. And many ISA investors achieve far more than that.

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Is it possible to earn £10,000 per year in passive income by investing in UK shares? I’d say that’s a definite yes.

Over the past 10 years, the average return from a Stocks and Shares ISA has been 9.6%.

To get £10,000 a year from an ISA at that rate, I’d need to build up a pot of close to £105,000.

That’s if annual ISA returns stay at 9.6% per year. Stocks and shares will perform differently every year, of course.

In the 2019-20 tax year, for example, investors lost a whopping 13.3% on average. It was due to Covid-19. But thankfully, years like that are rare.

Long term

Over the very long term, the UK stock market has gone up and up, beating other forms of investment hands down.

It might be hard to see that right now, as we’ve had so many crises: banking crunch, Brexit, war, inflation, energy prices, interest rates…

Still, we’ve had crisis periods before. And when we look back at the long-term FTSE 100 chart, they’re just minor blips now.

This is all very well, but it doesn’t tell me how to build up a pot of more than £100,000 to earn my passive income. And, to add a bit of safety in case of weaker ISA returns in the future, I’d feel better with around £120,000.

A serious amount

That might look like a daunting amount of money.

But thousands of ISA investors in the UK have already achieved it, and much more beyond.

In fact, at the last count, there were around 2,000 ISA millionaires in the UK. It took them, on average, around 20 years to get there.

And just think. A million in an ISA could generate £96,000 per year in passive income, based on the past decade’s returns.

Even with an average of 6%, an ISA millionaire could still pocket a cool £60,000 each year. And even better, that’s tax-free ISA income.

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.

Full allowance?

Most of these ISA millionaires use their full allowance every year. Starting today, £20,000 per year would amount to a £400,000 in 20 years. But that’s just the sum invested, with no annual returns.

Suppose that 9.6% per year holds up. An investor who reinvests all their dividends in more shares could end up with around £1.15m in 20 years. Even a 6% annual return would reach £750,000.

It suggests I could reach my target of £120,000 by investing a lot less than the full amount. In fact, I could get there in 20 years with just £2,200 per year at 9.6%.

Or at 6% returns, I’d need to put around £3,200 per year into shares in my ISA.

What to buy?

But which stocks do ISA millionaires actually buy? They mostly go for top-quality FTSE 100 stocks paying good dividends. And they put a fair bit into investment trusts too.

So will I reach my target of £10,000 passive income from my Stocks and Shares ISA? Well, I’m part way there. And by learning from the ISA millionaires, I reckon I can do it.

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.

Views expressed 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.

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