Here’s how much an investor needs in an ISA to generate a £27,500 second income

Millions of Britons invest for a second income. We invest, ideally through a Stocks and Shares ISA, over a long period of time with the aim of building a portfolio that’s large enough to sustainably generate an income. It doesn’t happen overnight, but in the end, it’s worth it.
So, why £27,500? Well, based on data from the Annual Survey for Hours and Earnings (ASHE) by the Office for National Statistics (ONS), the net average monthly earnings (this is after tax) are £2,297 (or £27,573) in the UK.
Here’s how it might be achieved by investing.
Playing the long game
In order to generate £27,500 a year from a Stocks and Shares ISA, someone needs £550,000 invested and to achieve a 5% annualised dividend yield. Now, this might sound a like a hard ask, especially if we’re starting from nothing. But I assure you, it’s entirely feasible.
There are lots of hypothetical or mathematical ways of getting to £550,000. However, all of these equations require investors to make consistent contributions and to reinvest the proceeds of capital gains and dividends.
In this example, a £550,000 portfolio could be achieved by investing £1,000 per month while achieving an annualised return of 10% over 17.5 years. At this point, an investor could move to a dividend-focused portfolio, or bonds, in order to take a tax-free second income.

However, we should remember the power of compounding. If an investor continues with the strategy for a longer period of time, the rate of growth would expand.
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.
Investments to consider
Of course, there’s a caveat. Invest poorly and people will lose money. With this in mind, novice investors are typically advised to take a diversified approach. This often means investing in an index tracker — a fund that aims to replicate the performance of an index.
However, some actively managed funds or trusts could give investors a better chance of beating the market. One option to consider could be Berkshire Hathaway (NYSE:BRK.B). It’s neither a fund nor trust, but a conglomerate with businesses in railroads and insurance, and stock holdings in companies like Apple, American Express, and Visa. In short, it invests in the backbone of the American economy.
While we’re currently seeing turmoil in US markets amid Trumpian uncertainty and recession fears, Berkshire Hathaway stock hasn’t been sold off. That might sound strange for a company that’s so tightly linked to the US economy. But there’s a good reason. The business has been slowly selling positions in its holdings over the past 18 months. Amazingly, it now has $334bn in cash.
Investors have been questioning why the Warren Buffett-controlled company has been turning to cash. However, with a recession becoming more likely and due to a huge selloff in US stocks, Buffett may be well positioned to make strategic acquisitions or initiate new positions in stocks.
Of course, there’s a risk with Berkshire, as there is with every investment. The risk is that Berkshire’s portfolio is incredibly concentrated on the US economy. During Buffett’s career, the US economy has outperformed, but there’s no guarantee that will continue forever. Nonetheless, I’ve recently become a Berkshire shareholder myself.
The post Here’s how much an investor needs in an ISA to generate a £27,500 second income appeared first on The Motley Fool UK.
But this isn’t the only opportunity that’s caught my attention this week. Here are:
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions,
he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy
— and discover:
- Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
- How to potentially get paid by the weather
- Electric Vehicles’ secret
backdoor
opportunity - One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
More reading
- Why isn’t everyone aiming for £37m in stocks and shares?
- Here’s how much an investor needs in a Stocks & Shares ISA for a £5,000 monthly passive income
- Has Warren Buffett just played a blinder in the stock market?
- £10,000 invested in Berkshire Hathaway shares 1 month ago is now worth…
- I’m following Warren Buffett’s lead and safeguarding against Trump’s trade tariffs
James Fox has positions in Berkshire Hathaway. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.