How much do you need in an ISA to target a £40k annual passive income?
The tax benefits of an Individual Savings Account (ISA) allow investors to significantly boost their chances of creating substantial long-term wealth.
With the Stocks and Shares ISA and Cash ISA — the two most popular products in this range — Britons can save or invest up to £20,000 a year. By doing so, they don’t have to pay a single penny in tax on interest, capital gains, or dividend income.
But the difference in what users of these products can expect to make over time varies considerable for each one. With this in mind, here’s how an individual targeting a £40,000 passive income in retirement could hit this ambitious target.
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.
Prioritising UK and US shares
Before I begin, I’d like to state that I own one of each of these ISAs. In fact, I also hold cash savings in a Lifetime ISA (annual allowance: £4,000). This gives me an added tax relief boost, which for me is worth the age-related withdrawal restrictions that the Cash ISA and Stocks and Shares ISA don’t have.
But I don’t treat these accounts equally. By some distance, the majority of my surplus cash is parked in my higher-returning shares ISA. I only put money in those other two ISAs to manage risk (and in the case of the Cash ISA, to give me access to emergency cash).
Since 2015, the average annual return on the FTSE 100 and FTSE 250 indexes is 7.2% and 5.1%, respectively. For US shares listed on the S&P 500, the return is even higher at 13.1%.
By comparison, the average savings account interest rate over the period sits way back at 1.2%.
Targeting a £40k+ income
Based on this, an investor looking to make an annual passive income above £40k in retirement could consider putting 80% of their cash in UK and US shares, and the remaining 20% in stable savings accounts.
If they invested £500 monthly, they’d have a pension pot of £703,589 if investing for 30 years. That’s assuming they achieve an 8.5% average return on their Stock and Shares ISA — mimicking the long-term average of the FTSE 100, FTSE 250 and S&P 500 — and 1.2% on their Cash ISA.
This fund then invested in 6%-yielding dividend shares would provide a subsequent £42,215 retirement income (although that’s in no way guaranteed).
A top trust
One cheap and easy way to target the wealth-building power of UK and US shares could be to buy an investment trust. The F&C Investment Trust (LSE:FCIT) is one such financial vehicle to consider for this strategy.
North American equities dominate the portfolio, comprising 62.7% of total holdings. Notably it enjoys high exposure to the ‘Magnificent Seven’ tech stocks Nvidia, Apple, Microsoft, Alphabet, Tesla, Meta and Amazon too, providing it with excellent growth potential.
Elsewhere, UK shares form its second-largest regional weighting, comprising 9.7% of the whole portfolio. Major names here include FTSE 100 stocks HSBC, Vodafone and RELX.
As with other share-focused trusts, F&C is vulnerable to periods of broader stock market weakness. But its powerful long-term performance helps soothe (if not eliminate) any fears investors may have.
Since 2015, it’s delivered an average annual return of 11.6%. If this continues, an investor here could hit their £40k passive income target far sooner.
The post How much do you need in an ISA to target a £40k annual passive income? appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of Motley Fool Money. Royston Wild has positions in HSBC Holdings. The Motley Fool UK has recommended Alphabet, Amazon, Apple, HSBC Holdings, Meta Platforms, Microsoft, Nvidia, RELX, Tesla, and Vodafone Group Public. 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.
