It’s possible to create an enormous passive income in the UK by investing in shares. Millions of Brits already do, giving them a handy extra income to supplement the State Pension. Without it, many of them wouldn’t be enjoying the comfortable retirement they currently enjoy.
But how do you start the ball rolling and begin building that extra cash flow? There’s no right or wrong answer to that question. But there are certain steps investors can take to boost their chances of achieving a juicy second income.
If you’re starting from scratch — or just looking for some pointers to boost your passive income — here are three strategies to consider:
1. Save on tax
The first step is to stop HMRC from grabbing a large chunk of your hard-earned returns. This can be done easily with a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP).
Both protect investors from capital gains tax and dividend tax. The effect is twofold — it means greater net profits. And with that profit, you can have more to invest to accelerate the compounding process, meaning a larger pension pot over time.
With the SIPP, retirees may have to pay income tax on any drawdowns. But this can be more than offset by the benefit of tax relief, which the ISA does not offer.
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.
2. Build a diversified portfolio
Even the most experienced investors buy shares that ultimately fail to deliver. Billionaire investor Warren Buffett famously lost a fat stack of cash when he bought Tesco shares in 2014, and cashed out before the share price recovered.
You’re likely to make mistakes, too. I certainly have. However, I’ve still managed to enjoy a healthy overall return from my portfolio. How? By holding a diversified mix of stocks spanning different sectors and reaching all parts of the globe. That way, I’ve successfully absorbed the impact when one or two holdings have disappointed.
In all, I hold roughly 25 shares, trusts, and funds across my ISA and SIPPs. These include income-paying dividend shares, and growth and value stocks for long-term share price growth. As a result, I can expect a healthy return at all points of the economic cycle.
3. Think long term
It’s easy to panic and sell your shares when the stock market looks set to crash. This can be an expensive mistake — over time, equity markets always bounce back strongly from crises that sink share prices.
Take HSBC (LSE:HSBA), a share I’ve bought for my own portfolio. Being a financial services provider, it’s experienced severe volatility at times, such as during the 2008-2009 banking crisis and the 2020 Covid-19 pandemic. But investors who held on have enjoyed excellent returns.
Over the last decade, HSBC’s share price has soared by 182%. Combined with dividends paid in that time, the bank’s shares have delivered an average annual return of 14.4%. Show me a savings account that has delivered that sort of performance.
The emergence of challenger banks poses an increasing risk going forwards. But I’m confident HSBC’s focus on fast-growing emerging markets should mean more juicy returns for long-term investors. And hopefully it will help me earn a big passive income in retirement.
