£20,000 yearly passive income? Here’s how much you need in an ISA

What does an ISA look like that is capable of creating a £20,000 passive income stream? Our Foolish author dives into the weeds.

| More on:

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.

Stack of one pound coins falling over

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.

Building a passive income stream as high as £20,000 per year is a daunting idea. For those on relatively average salaries, work often decades of tireless frugality, saving, and investment. The rewards of an earlier retirement or financial freedom are often worth it.

A Stocks and Shares ISA is an ideal place to build such a passive income. Anyone can open one with a few taps on a smartphone. It takes seconds to invest in all manner of stocks from around the world. The 0% tax on everything inside the account isn’t bad either.

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.

How much is needed to hit that £20,000 a year figure? That all depends on the drawdown rate. A 4% yearly withdrawal is considered somewhat safe. That would require £500,000 in total. Some aim for 5% by way of high-yielding dividend stocks. That would require £400,000.

Working well

One strategy to achieve such high net worth (and one that is getting more and more popular these days) is index funds. These funds track entire markets like the UK FTSE 100 or the US S&P 500. Folks put their savings in and hope for 8%-10% (in line with historical averages).

While this is an easier investing plan, it comes with several disadvantages. The primary downside, to my eyes, is that the incredible success of an index’s best companies is smoothed out by the rest. Rolls-Royce (LSE: RR.) shares are up 20 times (over 2,000%) since the delightful era of the Liz Truss premiership. The Footsie is up just 38%.

That’s not to say stock picking is a walk in the park. Even the best investors make lots of mistakes. American investor Peter Lynch famously said he aimed for ‘six good picks out of 10’. It worked out for him, though. He’s a billionaire.

Long way to go

Though such rapid gains are unlikely from here on in, I still think Rolls-Royce is worth considering today. The manufacturing giant has many a string to its bow, including engines for aircraft, power systems, and defence applications, too.

Take small modular reactors (SMRs) for instance. These are like tiny nuclear power stations. Their small size means they are easier to manufacture, but they can still power a million homes each.

Countries including the Czech Republic, Sweden, the Netherlands, and Hungary have already signed contracts with Rolls-Royce or are in some kind of partnership on the issue. Even the UK is getting in on the act with Great British Energy committing £2.5bn in a recently completed deal.

The viability of SMRs is still uncertain. The only commercially working one is on a lake in Russia. The prospect of using these small nuclear power stations for energy is one for the 2030s or perhaps even later.

But there is a chance that SMRs will be the perfect counterpart to solar and wind energy generation in a greener, Net Zero future. In that case, the Rolls-Royce share price might have a long way to go yet.

John Fieldsend has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. 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

Dividend Shares

2 FTSE 250 dividend shares yielding over 10% I like for 2026

Jon Smith reviews a couple of FTSE 250 companies with double-digit yields he feels have positive outlooks for the coming…

Read more »

Portrait of pensive bearded senior looking on screen of laptop sitting at table with coffee cup.
Investing Articles

This FTSE 100 stock tanked in 2025. Can it rebound in 2026?

The FTSE 100 index soared last year, but shares in the owner of the UK's stock exchange plummeted. Will they…

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing Articles

Can Barclays shares do it all over again in 2026?

Barclays shares had a spectacular return in 2025, rising by 76.8%. Muhammad Cheema takes a look to see if they…

Read more »

Investing Articles

This FTSE 100 stock supercharged my SIPP in 2025. Can it repeat the trick in 2026?

A FTSE 100 stock has lifted my SIPP this year, showing how long-term thinking, volatility, and optionality can shape retirement…

Read more »

UK supporters with flag
Investing Articles

£1k invested in the UK stock market during the pandemic is currently worth…

Jon Smith not only points out the specific gains from investing in the stock market generally since the pandemic, but…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

Will Nvidia shares continue surging in 2026 and beyond?

2026 will be an exciting year for Nvidia shares as the semiconductor giant launches its latest generation of AI chips.…

Read more »

Investing Articles

Check out the BP share price and dividend forecast for 2026 – it’s hard to believe!

Harvey Jones is feeling rather glum about the BP share price but analysts reckon it's good to go. So who's…

Read more »

Investing Articles

I asked ChatGPT for its top FTSE 100 stock for 2026, and it said…

Muhammad Cheema asked ChatGPT for its top FTSE 100 pick, and its response surprised him. He thinks he’s found an…

Read more »