UK stocks have performed pretty disappointingly over the past decade. But they’re back in high demand as bargain hunters — encouraged by the more stable political environment — have sought out quality, undervalued shares.
If an investor was starting from scratch today, here’s a strategy they could use to build a £20k+ passive income from shares.
Eliminating tax
The first thing to do is open a tax-efficient Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP).
Within the first category, we’re able to buy shares, funds and trusts in either a Stocks and Shares ISA or Lifetime ISA. We can do the same with a SIPP, a product which also provides us with tax relief (the level of which depends on one’s personal income tax bracket). The Lifetime ISA also comes with a handy government top-up.
The amount we can invest differs enormously among these producys. For the SIPP, we can invest the equivalent of my annual earnings (up to a limit of £60,000). The amounts on the Lifetime ISA and Stocks and Shares ISA are £4k and £20k respectively, though these may change following March’s Spring Statement.
Big changes to the broader ISA regime are expected as the government seeks to boost investment in UK shares.
Over time, the ISA and SIPP often save investors tens of thousands of pounds in tax. It’s important though to carefully consider conditions on withdrawals and potential penalties before using one of these products.
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.
Choosing an ETF
With an ISA or SIPP set-up, we can look to build a diversified portfolio of assets. This can take time to achieve, but it’s an important step for wealth-building and capital preservation.
Investors today don’t have to spend a fortune or wait years to achieve a well-rounded portfolio though. This is thanks to rapid growth in the exchange-traded fund (ETF) market.
Like investment trusts, these products invest in a wide range of financial securities, giving investors excellent diversification from the get-go. Currently there are more than 1,700 listed on the London Stock Exchange, providing access to a broad spectum of asset classes, industries and regions.
What’s more, investors don’t have to pay stamp duty at 0.5% when purchasing an ETF. This tax is applicable on all stocks not listed on the Alternative Investment Market (AIM).
The SPDR FTSE UK All-Share ETF (LSE:FTAL) could be a great fund for investors for investors to consider today. With positions in 531 separate UK shares, it provides exposure to stable, blue-chip companies along with smaller businesses with high growth potential.
Some of the largest holdings here are FTSE 100 shares AstraZeneca, Shell, HSBC and Unilever.
Since its inception in 2012, the fund has delivered an average annual return of 7.2%. If this continues, a £400 monthly investment via a tax-efficient ISA or SIPP would, after 30 years, create a retirement fund of £507,690.
This could then provide an annual passive income of £20,308, based on an annual drawdown rate of 4%.
Returns could be bumpier during economic downturns when share prices tend to underperform. But I’d still expect it to deliver strong returns over the long haul.
In fact, with UK shares coming back into vogue, now could be a great time to consider investing in a fund like this.
