An ISA is considered by many to be the best option for a reliable, effortless passive income stream. That’s because investing in thriving businesses can give some of the highest returns available to average investors. That a Stocks and Shares ISA shields every single pound of earnings from the taxman is key here.
Going from an empty ISA to a solid income like £2,000 a month can seem hard, especially for those who haven’t invested before. That’s why shrewd planning is the way to go. Simple but achievable targets can make the journey of a lifetime into a breezy walk in the park. Using AI models could be one of several was to find out how much would be needed in an ISA to target passive income of £24k a year.
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.
The answer
The answer to that question for me was the usual Large Language Model fare of taking 2,000 words to say something that could be expressed in 200. Nonetheless, the most intriguing part of the answer was the following table:
| Target Annual Yield | Capital needed | Investment Type Example |
| 8% | £300,000 | Higher-yielding dividend stocks/actively managed funds (higher risk) |
| 5% | £480,000 | Diversified portfolio of dividend funds, or long-term average return target for growth/income mix (Moderate risk) |
| 4% | £600,000 | Portfolio of lower-risk, lower-yield assets, or common ‘safe withdrawal rate’ target |
| 2% | £1,200,000 | Long-term Cash ISA or low-yield bond fund (Lowest risk) |
The bottom row of the table highlights why relying on a Cash ISA is only for the totally very. The 2% return needs, as the table shows, millions put in to get a decent income. A decade ago, average savings accounts were paying even less – 0.25% or so! Good luck getting passive income out of that.
The top of the table shows the other side of the story. That 8% return looks attractive. A £300k nest egg paying out £24k sounds good too. But finding stocks that pay a yield that high is hard. Finding ones that pay it regularly is even harder.
The missing part of this particular jigsaw is good stock selection. With companies that are growing and pay dividends as well as seeing higher share prices, we can accelerate our income accumulation. For example, if our nest egg grows from £300k to £600k, then the dividend yield needed goes down by half.
One to watch?
A stock that might be worth considering today is easyJet (LSE: EZJ). The airline pays a 2.45% dividend yield today, which is low. But with the company at a low ebb. Buying the shares when they’re cheap is one way to see a big return on investment.
easyJet shares are still down 46% since the pandemic. Peers like International Consolidated Airlines have recovered as the number of passengers breaks new records. If easyJet could return to its previous share price then that would mean nearly doubling in value.
The rumours of it being a takeover target also suggest that it’s seen as undervalued. In recent days, a potential takeover bid has made headlines because of the lagging share price. That could be a further reason that this might be a good option for investors to research further.
