Many people in the UK are already generating tax-free passive income through a Stocks and Shares ISA. And given that there are thousands of investors with ISAs worth well over £1m, a fair few of those will likely be funding their lives entirely through their portfolios.
In this article, I’ll look at how much passive income a 30-year-old could potentially earn in retirement if they were to invest £700 a month.
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.
Sitting in Cash
First, let’s see how much someone would have by the age of 68 saving £700 a month in a Cash ISA. Starting from scratch at 30, they would end up with £475,686.
Now, I should say we have no idea what the average return on cash will be over the next three to four decades. After the 2008 financial crisis, interest rates fell to near-0%. More recently, they’ve been above 4%. For simplicity’s sake, I applied a rate of 2% above, which would translate into £9,513 a year in income at retirement.
Also, there has been widespread reports that the government is planning to reduce the annual cash ISA allowance (possibly down to £4,000 from £20,000). That should presumably make a Stocks and Shares ISA relatively more attractive.
Investing in stocks
According to Moneyfacts, the average rate of return for a Stocks and Shares ISA over the past decade is 9.6%. That chimes with the long-term average of global stocks, which is about 10%.
Of course, the return for an individual could be far more or less than that, depending on how well their investments do. But I think a great foundational investment to consider for a portfolio is the iShares Core MSCI World UCITS ETF (LSE: SWDA). This exchange-traded fund (ETF) offers investors broad exposure to around 1,395 global companies within 23 developed countries.
Over the past 10 years, the total return (in US dollar terms) has been 10.6%.
The top five holdings today are Apple, Nvidia, Microsoft, Amazon, and Facebook owner Meta Platforms. This reflects the fact that these are the largest companies in the world.
However, while around 27% of an S&P 500 index tracker fund is invested in these five tech giants, that falls to less than 19% for the iShares Core MSCI World ETF. Therefore, this option gives better portfolio diversification.
Outside of the big tech staples, investors would also get exposure to blue-chips like AstraZeneca and HSBC, as well as fast-growing software firms like Palantir.
One risk to be aware of here is that the IT sector makes up 25% of the ETF. If this area of the stock market were to sell off, the ETF’s performance would suffer. And there’s a risk that AI spending could slow, impacting the earnings of large holdings like Nvidia.
How much passive income then?
If a Stocks and Shares ISA returns 10% over time, it ends up being worth far more than £475k. In fact, the total value would be more than six times higher at just under £3.2m (excluding platform fees).
It’s truly amazing that investing the equivalent of £161 a week can lead to a multimillion-pound ISA!
So, how much passive income could a portfolio this size be generating each year? Roughly £192,000, assuming a 6% yield.
