How to turn a £20k ISA into a £17,423 yearly second income

If I was starting from scratch with an ISA account, I think I’d aim to turn it into a useful second income, possibly even higher than £17k a year.

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.

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.

Image source: Getty Images

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.

Let’s say I had £20k in my ISA account. I think I could turn it into a second income of over £17,000 a year, or £17,423 to be precise.

Per month, that’s about £1,500. I’d love that kind of money flowing in. I could use it to top up a pension, cut down on hours at work or even retire earlier. 

And if I’m smart with how I manage it, I could keep a nest egg of a few hundred thousand. I’d sleep well with a rainy day fund like that. It could even be something to leave behind, eventually, to loved ones as well.

A Stocks and Shares ISA is how I’d work towards this income. It can help me build wealth perhaps better than any other option I’ve got here in the UK. I might aim for a yield of 8-10% on the money I put in and, because it’s an ISA, my returns are not taxed.

Other options aren’t nearly as good, I feel. Buy-to-let is popular and can be lucrative. But if I went for that, I reckon I’d be worse off. The average rental yield in the UK is only 3.63% right now, and there’s tax to think about on top of that. 

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.

4,000 millionaires

These ISA accounts are fairly popular these days too. I think it’s fair to say many Britons are using stocks to make money. And a recent report showed the number of ISA millionaires had tripled and was now up to around 4,000. 

Let’s see what I could achieve with my £20k ISA. I’ve also included what happens if I top it up with £100 a month. If I drip-feed even a little extra from a day job, it can make a life-changing difference to the final total.

£20k ISA£20k ISA + £100 p/m
DepositWith 9%DepositWith 9%
1 year£20,000£21,800£21,200£23,049
5 years£20,000£30,772£26,000£38,246
10 years£20,000£47,347£32,000£66,319
20 years£20,000£112,088£44,000£175,973
30 years£20,000£265,354£56,000£435,565

These sums look pretty nice to me, especially when I look at how small the deposits are. But I have to point out that I might not achieve a 9% annual return and could even lose money.

Of course, the nest egg isn’t useful to me just sitting there in my account. I want to use it to give me a second income, and the term ‘safe withdrawal rate’ (SWR) is useful here. 

An SWR refers to how much I can withdraw with still a good chance to keep the nest egg intact. A 4% withdrawal – usually considered pretty safe over decades – eventually gives that £17,423 second income each year.

A lot of people will like the look of that figure but be put off by the risks. It’s true that nothing is certain with the stock market. There will be ups, downs, crashes and corrections. It’s perhaps not for the faint of heart. And inflation means that amount will be worth less in the future.

But if I do want to invest in stocks, then every day or week I put off or delay my decision could cost me a lot in the long run. 

20 best days

In fact, over a recent 20-year period, all the returns from the stock market came from the best 20 days. Even a missed day or two could seriously dent the amount I make. It’s one reason why “time in the market beats timing the market”. 

That’s why if I was starting from scratch, I’d look to invest in a Stocks and Shares ISA today. With the right choices, I’d look to turn my cash into a sizeable income.

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.

John Fieldsend 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

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »