Here’s how I could make a £3,673 monthly passive income with UK stocks

With these investing tricks I think it’s possible to build a life-changing passive income for retirement via UK stocks. Here’s how I’d do it.

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History isn’t always a reliable guide to the future. But based on past performance, trying to build a passive income with a balanced portfolio of FTSE 100 and FTSE 250 stocks could be a great idea today.

Here’s how I’d invest a lump sum to build a healthy nest egg for retirement.

Cut out the taxman

The first thing I’d do is protect myself from any wealth grabs from the taxman. When I use a general investment account (GIA), HM Revenue and Customs can take a slice of my capital gains and my dividend income if certain allowances are breached.

The capital gains tax allowance has plummeted to £3,000 in the 2024/2025 tax year from £6,000 previously. Meanwhile, the dividend allowance has also halved to £500.

Tax is applicable above these thresholds and, over time, it can add up to a pretty penny. To avoid this, I’d open up an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP), perhaps both.

With a Stocks and Shares ISA, no tax is payable to HMRC, regardless of the size of my profits. On the downside, I can only invest £20,000 a tax year, though this is usually enough for most investors.

There’s no such limit for SIPP investors. Individuals can also claim minimum tax relief of 20% a year, meaning the government will put in £1 for every £4 invested.

Be aware that monies can only be drawn at age 55 (or 57 from 2028), while income tax may also be payable at this point. Still, the perks of this product may still make it suitable for those building wealth for retirement.

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 great FTSE stock

So what would I buy first for my ISA or SIPP? I think BAE Systems (LSE:BA.) could be a rock-solid long-term investment. And buying it today could be a good strategy as global arms spending surges.

Defence expenditure rose 9% in 2023 to record peaks of $2.2trn, according to the International Institute of Strategic Studies. And further increases are tipped as geopolitical tensions rise.

BAE Systems is enjoying strong demand against this backdrop and last year reported record order intake of £37.7bn. This reflects the company’s close relationships to Western governments, its cutting-edge technology, and the broad range of hardware it supplies.

On the flip side, setbacks could impact near-term revenues at the FTSE firm. They could also damage its ability to secure contracts later on.

But, on balance, I think this is a very attractive share to consider buying in the current climate.

A £3,673 passive income

With a diversified portfolio of FTSE 100 and FTSE 250 shares, such as BAE Systems, I could realistically expect to enjoy a splendid average annual return of 9.3%.

This would turn a £20,000 lump sum investment into £322,137 over 30 years, excluding fees. And if I added an extra £300 a month to my investment account I would transform that into a terrific £1,101,845.

I could then draw down 4% of this amount each year for a healthy passive income of £44,074, equating to £3,673 a month.

Over the long term, investing in UK blue-chip shares is one of the best ways to build a long-term second income, in my opinion.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems. 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.

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