The Stocks and Shares ISA annual tax-free allowance is locked at £20,000 for 2026, but from April 2027, the Cash ISA allowance drops to £12,000. This is a wake-up call for investors amid falling rates and persistent inflation.
So what’s the optimal way to rebalance assets and beat inflation with minimal risk? Let’s take a look.
Inflation and interest rates in 2026
With UK CPI expected to hover around 2.1%-2.5% through 2026 and 2027, cash savings could erode fast. Meanwhile, factors like China’s slowdown and OECD growth upgrades to 1.2% threaten to shake up global markets.
For savvy middle-aged investors, a sharper focus on reliable income shares may be a good way to navigate the inevitable turbulence. But it’s no good throwing cash at any old stock. To target consistent returns for decades to come, first you’ll need to carefully assess a dividend’s sustainability.
Here’s one strategy to target £10,000 in annual passive income, and why a Stocks and Shares ISA wins for retirement or house-buying goals.
An ISA comparison
While a Cash ISA is the ‘safer’ option, its appeal’s waning amid shifting economic policy. Some of the leading easy-access Cash ISAs only yield the pre-tax equivalent of 3.5%-4% today. To achieve £10k in annual income, £250,000-£285,000 would be needed.
Inflation at 2.1% reduces that down to a 1.4%-1.9% real return and after 10 years, £250k buys what £200k does today. Once the 2027 limits kick in, the cap would be maxed out quickly, forcing taxable savings or riskier moves. With interest rate cuts threatening further erosion, this isn’t an ideal option for 10-20 year horizons.
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.
Growth and income potential
Dividend-focused portfolios historically deliver 6%-8% yields with 2%-4% growth, easily outpacing inflation. When invested tax-free via a Stocks and Shares ISA, only £125,000 to £167,000 would be needed to target £10k annually.
For example, £20k in an ISA yielding 7% returns £1,400 in the first year. Reinvest the dividends and after 10 years, it could be worth around £40k, yielding £2,800. A Cash ISA? Still stuck around £27k, with its real value down 20%.
Two UK dividend stars
Legal & General‘s (LGEN) long been a go-to for retirement savers chasing decent passive income without breaking a sweat. Typically yielding between 8%-9%, a £20,000 ISA stake could throw off around £1,700-£1,840 annually – tax-free. That’s miles better than a Cash ISA at today’s rates.
Commanding a lion’s share of the UK pensions and asset management market, it tends to generate steady cash regardless of economic unrest. Management has an excellent track record of targeting 2%-3% annual dividend growth, so it does well to chase inflation. Plus, payouts are backed by a solid balance sheet, with 217% Solvency II cover.
Still, dividends are treading a thin line with minimal earnings coverage. If any unexpected regulations or market wobbles hurt profits, the board might cut payouts to protect the balance sheet. Not a death knell, but investors should watch results closely.
Bottom line
Dividend shares like Legal & General may be worth consideration by patient retirement investors willing to hold through bumps for reliable income growth. But don’t just focus on one stock – at the Fool UK, we cover a wide range of similar shares designed to deliver reliable passive income.
