A second income is the holy grail for many investors, and a Stocks and Shares ISA can be one of the most effective ways to work towards it.
Yet despite the generous tax advantages, uptake remains far from universal. HMRC data shows more than 22m adults hold an ISA, but only 4.2m choose to invest through a Stocks and Shares ISA.
Separate surveys suggest this isn’t due to lack of interest in investing — many people simply don’t understand how the Stocks and Shares ISA works, and a significant proportion (17%) have never heard of it at all.
That’s unfortunate, because the long-term performance gap between cash ISAs and investment ISAs is considerable.
Over the past decade, the average Stocks and Shares ISA has delivered close to double-digit annual returns (9.6%), compared with low single-digit outcomes for cash. And because all gains, dividends, and interest within the ISA are sheltered from tax, compounding isn’t hindered by annual tax drags.
For investors aiming to build long-term wealth — and ultimately generate stable monthly income — the mechanics are straightforward. A pot of about £150,000 could support around £500 per month using a cautious 4% withdrawal model, while £300,000 could roughly double that.
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.
Running some maths
Of course, it all depends on the time horizon. Let’s imagine an investor contributes £500 per month to their Stocks and Shares ISA and achieves 9.6% average annualised growth over the next 30 years. Well, at the end of the period, they’d have £1.06m. That’s a huge figure.
And I’ll be bold and suggest that a 5% withdrawal rate could also be sustainable. That translates to £53,000 per year or £4,400 per month. Yes, that’ll be worth less in 30 years than it is today, but it’s still a huge net gain.
Where to invest for growth?
Most of us at the starting point of our ISA journey wonder how we can grow our portfolios by nearly 10% per year, or even more. With funds, trusts, stocks, and bonds to choose from, among some other investment opportunities, it can be hard to know where to start.
One interesting prospect is Yü Group (LSE:YU) is a UK business-energy supplier that operates a growing smart-meter business, focused on electricity and gas for SMEs and corporates. In 2024, it grew revenue by 40% with equivalent energy volume up 78%, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) rose to £48.8m.
The firm now supplies 106,000 meter points, according to the interim report. That’s up 48% year on year. In H1, revenue was £341m (+9%) with “smart meters owned” soaring 179% and generating £1.8 m of recurring income.
However, there were some signs of the market normalising. Average monthly bookings were £41.4m, down 12% year on year as wholesale prices fell. And like any investment, there are risks, including commodity-price volatility and exposure to bad debt in the SME market.
Nonetheless, it’s sitting on £109m of net cash and earnings are still progressing. With an enterprise value-to-EBITDA ratio of 3.4, it’s certainly worth considering.
