Passive income of £2,000 a month in an ISA? Here’s how an investor could aim for that
The ISA is a brilliant way for investors to generate a tax-free passive income for their retirement. It’s also a great way to generate tax-free growth. Both are free inside the tax wrapper, making it a brilliant way to build wealth over time.
At The Motley Fool, we believe investors can generate generous share price growth and dividend income from a balanced portfolio of FTSE 100 and FTSE 250 shares. Entirely tax free. The annual deadline for contributing to this yearâs Stocks and Shares ISA allowance expires exactly two weeks today, on April 5. Use it or lose it.
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.
Build that FTSE portfolio
Let’s say an investor wants to generate a second income of £2,000 a year, on top of their State Pension. That adds up to a handsome £24,000 a year. Free of tax, of course.
The 4% ‘safe withdrawal’ rule suggests that if investors take that percentage of their portfolio as income each year, the underlying capital will last as long as they do. So to generate £24k, they’d need a pot of £600,000. Which sounds an awful lot, but can be done with time. Even if investors fall short, they’ll still be a lot better off than if they didn’t try at all.
Let’s say somebody is 30 years from retirement, and builds a portfolio of FTSE 100 shares that deliver an average annual compound return of 7% a year, with dividends reinvested. Theyâd need to invest £500 a month, or £6,000 a year. That’s well within the £20,000 allowance.
But which shares should they buy? Stock markets are volatile right now, due to the Iran war, but lots of shares have held up pretty well.
HSBC shares worth considering
The HSBC (LSE: HSBA) share price has dipped 5% in the last month, but itâs still climbed 38% over the last year. Over five years, it’s up a mighty 180%. It’s also paid investors heaps of dividends, turbo-charging their returns.
Today, the Asia-focused bank offer a trailing dividend yield of 4.6%, well above the FTSE 100 average of around 3%. Sometimes I’m wary of buying shares after they’ve had a strong run, in case they’ve raced ahead of themselves. Future growth may be slower, or they could even retreat. Of course, this could happen with HSBC, but it’s a solid business, with a huge growth opportunity in greater China.
It’s a true global brand that’s been making massive profits lately â almost $30bn in 2025. That was actually down 7% on the previous year’s $32.3bn, due to one-off costs such as legal charges, a write down and the sale of a loans portfolio. It’s still an awful lot of money.
Every stock has risks. If the global economy slows or slips into recession and customers go bust, HSBC could end up with a lot of loan impairments. Falling interest rates could also squeeze net interest margins, and profits. But I think with a long-term view, it’s well worth considering.
There are plenty more bargain FTSE 100 shares I’d consider adding to my ISA today. Both for growth and passive income. Or with luck, both.
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More reading
- 2 top stocks to consider buying after this weekâs FTSE carnage
- How much do I need in a Stocks and Shares ISA to earn an £800 monthly second income?
- Down 12% to under £13, is this exactly the right time for me to buy more HSBC shares?
- How much do I need in an ISA to aim for a £500 monthly second income?
- Barclays and HSBC shares are plunging today â is this my moment?
HSBC Holdings is an advertising partner of Motley Fool Money. Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.
