3 steps to aim for a lifetime of passive income from a new ISA
Want a stream of tax-free passive income? Investors just got a new ISA limit to use in the coming 12 months. We can contribute up to £20,000 between now and 5 April 2027, and keep every penny in profits.
But all this Stocks and Shares ISA stuff is complicated, right? And who has 20 grand to stash away? Well, it’s actually quite straightforward. Here are three key steps.
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.
Step 1: pay in some cash
Opening an ISA online is fairly easy these days. Just head over to your online ISA provider of choice — and all the ones I’ve looked at have clear instructions to follow. They accept one-off transfers, or monthly direct debits from as little as around £25.
And we really don’t need a lot to get started. Maybe just £25 each month, and top up whenever we have spare cash. Even that could build to a significant pot over the long term.
There’s no need to buy shares by any deadline. So we can leave the cash there as long as we like, until we know what we want to buy. The time limit for the £20,000 applies only to money paid in, not actually invested in shares.
Step 2: decide on a strategy
What about an investment strategy? Tech growth shares have been making great strides. But falls in the past few months have highligted the potential danger too. AI chip leader Nvidia, for example, has dipped 19% since October.
The FTSE 100 has some tempting dividend shares. Legal & General tops the list with a forecast 8.6% yield — although that’s not guaranteed, so there’s different risk there. Reinvesting dividends in more shares could build up to a decent passive income pot over the years.
Daily at The Motley Fool, we publish a number of free-to-read articles. Each covers at least one stock to consider. Investors could do worse than reading them to get a feel for which kind of companies they might like.
Just remember one vital part of any strategy. Diversification across different companies and different sectors is essential. Spread out, the chances are that fewer eggs will be broken if the market drops a basket.
Step 3: buy something!
Buying our first share can be an exciting moment. And there’s a class of stock that I think can help with our strategy. They’re investment trusts like The City of London Investment Trust (LSE: CTY). This one holds a range UK stocks, aiming for long-term income and capital growth.
It picks a range of different companies, which we can them explore to help decide on a longer-term strategy. And it provides much-needed diversification in one go. Its top 10 include HSBC Holdings, Shell, BAE Systems… and a variety of others.
The trust has raised its annual dividend (currently at an estimated 3.9%) for 59 years in a row. That does highlight a risk, as I’d expect the share price to fall should the dividend fail to grow one year. And even a diversified investment like this can’t avoid a general stock market slump.
But I think this — or a similar investment trust — is one every new ISA investor aiming for passive income should consider when starting out.
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More reading
- Turning a £20k ISA into a £2,400-a-year second income
- With a spare £380, hereâs how someone could start investing before April!
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HSBC Holdings is an advertising partner of Motley Fool Money. Alan Oscroft has positions in City Of London Investment Trust Plc. The Motley Fool UK has recommended BAE Systems, HSBC Holdings, and Nvidia. 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.
