It’s never been easier to generate a tax-free second income in a Stocks and Shares ISA than today. Thanks to the internet and swarms of competing online brokers, investing has also never been cheaper.
Indeed, it’s perfectly viable to get the ball rolling with just £500 (or even less) because some apps don’t charge trading fees. From this tiny acorn, it’s possible to build an impressive future second income.
Let’s crunch some numbers to find out more.
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 4% rule
Twelve months of £1,500 adds up to £18,000 a year. Using the 4% withdrawal rule, which is the idea that a retiree can withdraw 4% of their portfolio each year without running out of money over 30 years, the ISA would need to be worth £450,000.
That sounds like a mountain to climb, especially when starting with £500. But by regularly drip-feeding this amount in every month, come rain or shine, the target becomes achievable over a reasonable timeframe.
For example, generating an annualised return of 9%, it would take just under 23 years to reach £450,000 by investing £500 every month. As anyone middle-aged knows, two decades can seem to fly by!
Staggering return
Note, I haven’t included any platform fees here, which can vary depending on which firm is used. On the other hand, I’ve used average global market returns in this calculation.
In reality, an investor battle-hardened over years would probably be able to spot a potentially lucrative bargain staring them in the face.
In other words, it’s possible to beat the market by picking stocks once enough knowledge has been accumulated over time. That’s when financial reports stop feeling boring or overly complicated and turn into documents containing potential nuggets of gold.
There have been numerous FTSE 100 stocks that have made their shareholders significantly wealthier in recent years. These include Lloyds, Rolls-Royce, BAE Systems, and gold and silver miner Fresnillo.
However, the most spectacular has been Games Workshop (LSE:GAW). Including dividends, the Warhammer maker has returned a mind-boggling 3,620% over the past 10 years — no other FTSE 100 stock comes close to that.
To put this staggering return in context, it’s a 43.5% annualised return. That would have been enough to turn a £500 investment into more than £18,000!
But is the stock still worth considering today? I think so. The company has unique intellectual property (IP) built up over decades and is successfully monetising it via video games and merchandise.
Amazon has bought the exclusive rights to make films and TV series. Set to star Warhammer fan Henry Cavill, this has the potential to attract many more customers into the company’s orbit.
Then again, the core fanbase (the primary drivers of the IP’s value) might reject it. So there’s always a risk that the content flops and damages the brand.
After falling 17% since November though, I reckon the stock’s worth a look. Games Workshop delivers some of the highest profit margins and returns on capital anywhere on the London Stock Exchange.
Time and effort
Anyone who’s willing to put in the time and effort to learn about stock investing can potentially generate market-beating returns. This isn’t guaranteed, but it’s certainly possible.
And a successful stock-picking strategy would obviously shorten the time it takes for an ISA to reach £450,000.
