With a Stocks & Shares ISA, Britons can substantially boost their chances of making a healthy long-term passive income. Since its introduction in 1999, it’s saved investors billions of pounds in capital gains tax (CGT) and dividend tax.
Rising CGT rates and falling dividend tax allowances mean these tax-efficient products are becoming more important than ever. Over time, these tax savings can mean a much larger retirement pot than using a bog-standard general investment account instead.
But how much would an ISA investor need to make for a £3,000 monthly passive income? Let’s take a look.
Why £3k?
Three thousand pounds is, in my opinion, a good potential target to consider. The exact amount needed will depend on an individual’s plans for later life, as well as current and expected financial circumstances.
But the £3k target’s a sensible one based on data from the Pensions and Lifetime Savings Association (PLSA). This shows the average single person will need £43,100 to live on a year for a “comfortable” retirement.
A £3,000 monthly passive income from a Stocks & Shares ISA comes out at £36,000 a year. With the State Pension also added to the mix, this amount should help investors beat that PLSA projection by a healthy margin.
ISA targets
Investors have multiple strategies to reach this monthly target, each requiring a differently sized ISA portfolio.
One popular tactic is to apply the 4% drawdown rule. This, as the name suggests, involves cashing in 4% of a portfolio each year (adjusted for inflation) to live off. It’s a popular strategy, as it provides a passive income for around 30 years before the well runs dry.
Based on this rule, an individual will need £900,000 in their Stocks and Shares ISA for a 30-year, £3k-a-month second income.
Another plan could be to buy high-yielding dividend shares. As dividends are never guaranteed, this can be a higher risk strategy. However, it may provide a rising income over time as companies increase their payouts, while also allowing investors to retain their capital base.
To use this strategy, an investor would need £720,000 in their ISA to start receiving a £3k monthly income, assuming dividend projections are accurate. That’s based on purchasing 5%-yielding dividend shares.
A top ETF
Stocks and Shares ISA investors have thousands of shares, funds and trusts they can buy to try and hit these targets. One exchange-traded fund (ETF) I’ve bought for my own portfolio is the index-tracking HSBC S&P 500 ETF (LSE:HSPX).
Since early 2015, this index of large US companies has delivered an average annual return of 12.7%. If this continues, I’d need to invest, over the next 25 years:
- Around £340 a month to achieve a £720,000 ISA
- Or roughly £425 monthly for a £900,000 ISA
That’s a pretty good return, in my opinion.
Past performance isn’t always a reliable guide of future profits and the S&P 500 could underperform if harsh new trade tariffs come into play.
But I’m optimistic the S&P 500’s high concentration of fast-growing tech shares (like Nvidia and Apple) will underpin further impressive returns. I’m also expecting a solid performance as interest rates fall and long-term economic growth continues.
It’s why the fund is a key plank in my own ISA.
