With £20,000 in savings, how much passive income can you realistically expect from a Stocks and Shares ISA?

A Stocks and Shares ISA is one of the most powerful tools available to UK investors aiming to build long-term passive income. By shielding gains and dividends from tax, it can quietly supercharge an investor’s financial goals over time.

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.

For many, dividend-paying companies are the cornerstone of this approach, delivering regular income alongside potential growth in share prices. But getting it right isn’t always easy – one wrong decision can cost dearly.

Dividends aren’t foolproof

Dividends can be alluring, especially when published yields look high. But it’s worth remembering that dividends are never guaranteed. A sudden cut can transform what appeared to be a golden goose into an expensive dodo. Often, very high yields signal potential trouble rather than opportunity.

Companies with thin cash reserves or high debt are the ones most likely to slash payments when profits fall. It’s a good idea for investors to inspect balance sheets and cash flows, not just the dividend headline. 

A track record also matters – firms paying regular dividends for decades typically show more reliability than newcomers, even if their yields are lower.

Realistic income expectations

With £20,000 in savings, expectations should remain grounded. Even with a generous 7% average yield, that’s only about £1,400 a year. The real power of a Stocks and Shares ISA lies in compounding – reinvesting those dividends back into more shares and letting the snowball grow.

On average, UK investors achieve around 10% total returns annually. At that pace, a £20,000 pot could grow to roughly £54,000 after 10 years. Using the same 7% yield, that would pay about £3,780 a year in dividends.

Keep reinvesting and holding for two decades and the pot might rise to around £150,000, generating income in excess of £10k a year – all tax-free within the ISA wrapper.

A dividend stock to consider

One FTSE 100 company for investors to consider for reliable income is Admiral Group (LSE: ADM). The insurer currently yields 7.15%, backed by a strong record of over 20 years of consistent dividends.

Recent results have been striking. Revenue jumped 22% year on year and earnings rose 106%. Meanwhile, Its return on equity (ROE), standing at 65%, is one of the most impressive in the UK market.

Dividends take up around 87% of earnings and are covered 1.6 times by cash, giving some breathing space even if profits dip. The balance sheet looks fine too, with debt only slightly above equity levels.

That said, no stock is entirely risk-free. Admiral faces fierce competition, changing regulations, and the potential impact of shifting interest rates – all of which could weigh on future payouts.

Bottom line

A £20,000 lump sum is a strong start, and using a Stocks and Shares ISA to shelter it from tax makes a lot of sense. But the real secret to success is patience. Over time, regular investing, reinvesting dividends and staying diversified can turn small beginnings into a steady stream of passive income.

With care and consistency, investors can build a tax-efficient portfolio that works quietly in the background – no guessing games required.

The post With £20,000 in savings, how much passive income can you realistically expect from a Stocks and Shares ISA? appeared first on The Motley Fool UK.

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Mark Hartley has positions in Admiral Group Plc. The Motley Fool UK has recommended Admiral Group Plc. 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.

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