See how you could target a £10,677 annual passive income from a £20,000 ISA

The annual ISA deadline is fast approaching, giving investors the chance to tuck away up to Â£20,000 before midnight on 5 April. Itâs an unmissable opportunity for anyone looking to harness the wealth-building power of FTSE 100 and FTSE 250 shares, free of tax inside a Stocks and Shares ISA.

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.

Putting money into the stock market today can grow into surprisingly large sums over time, helping set people up for a much more comfortable retirement.

Most of us canât afford to save the full Â£20,000 ISA allowance every year. Thatâs fine. Even smaller, regular contributions add up if investors stick with it, year after year. But one year of investing the full Â£20,000 can still make a huge difference, especially for younger people, whose money has decades to grow.

Wealth from FTSE 100 shares

Take a 32-year-old who uses this year’s full allowance then leaves it to grow until retirement at 67. Let’s assume they reinvest every single dividend and achieve a long-term total average return of 7% a year. After 35 years, that Â£20,000 could turn into Â£213,532. That’s more than 10 times their original investment. Which looks like a pretty good use of their money to me.

So how much income could that generate? Using the 4% rule, which suggests investors who take 4% of their portfolio won’t erode their capital, they’d get Â£8,542 annually. If they invested in a spread of UK shares yielding 5% on average and took that, they’d get income of Â£10,677.

It’s not enough for a comfortable retirement income on its own, and future inflation will reduce its purchasing power, but itâs still a solid return from a single yearâs Stocks and Shares ISA contribution. The key is to leave the pot untouched, and avoid leaving long-term savings to launguish in cash. Shares can be volatile in the short term, but over decades, compounding does its work.

GSK offers income and growth

Investors should aim to hold at least a dozen individual stocks, possibly supplemented with a tracker fund following the FTSE 100 or S&P 500.

Pharmaceutical firm GSK (LSE: GSK) could be a good place to start. Itâs a relatively defensive company as people need medicine regardless of the economic cycle. For years, GSK was a blue-chip favourite, offering steady share price growth and reliable dividend income of more than 5% a year.

Then it fell behind as key treatments went off patent, forcing heavy investment in its drug pipeline. Dividends were frozen, and shares struggled, but things are finally improving.

The GSK share price has climbed 33% over the last year, yet it still looks reasonably priced with a price-to-earnings ratio of 11.7, well below the FTSE 100 average of around 18. Its dividend yield isnât as strong as it once was at 3.35%, but forecasts suggest it could reach 3.75% in 2026, as the board hikes dividends.

Developing drugs remains expensive and slow, and US tariffs are a concern, so risks remain. But GSK could form a valuable part of a balanced portfolio, blended with companies offering higher growth potential.

The most important step? Using that ISA. The sooner investors start, the longer their wealth has to compound, and the bigger that potential second income could be.

The post See how you could target a Â£10,677 annual passive income from a Â£20,000 ISA appeared first on The Motley Fool UK.

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Harvey Jones has positions in GSK. The Motley Fool UK has recommended GSK. 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.