How much do I need in an ISA to earn £10,000 of passive income a year?
Many of us dream of holding an investment portfolio that delivers enough passive income every year to significantly improve our quality of life.
While that goal might feel distant, with a consistent approach to Individual Savings Accounts (Isas) contributions it can be surprisingly accessible. That’s thanks to two key tax benefits:
- Investments returns within Isas are protected from taxation, and can therefore accumulate at a faster rate than returns outside a tax wrapper
- Money can be withdrawn from an Isa tax-free, whereas passive income from other sources, such as property, is sometimes heavily taxed
Of course, building this dream investment portfolio still requires patience and commitment – but it could be easier than you’d expect. Here’s one way that it can be done.
Can you earn £10,000 a year from a cash ISA?
A cash ISA can only deliver income in the form of interest. Currently, the best interest rates on cash ISAs are up to 5 per cent. So, if you have £200,000 or more in a top cash ISA, you could expect to earn £10,000 over one year, tax free.
However, interest rates change frequently, and aren’t expected to remain at this level for long. Rates can fall to close to zero and so interest alone cannot be relied upon to deliver a consistent annual income over the long term.
It’s easy to see that withdrawing £10,000 per year from a cash ISA worth £200,000 – and earning no interest – would exhaust the funds in 20 years.
Add in that Cash Isas are currently the subject of a debate which could see allowances cut and it may soon take a lot longer to build up that level of savings in one in any case.
Can you earn £10,000 a year from a stocks and shares ISA?
A stocks and shares Isa on the other hand can generate income in several different ways:
- Interest earned on any cash balance
- Interest paid on government or corporate bonds
- Dividends paid to you as a shareholder
Stocks and shares Isas can also deliver capital gains on the sale of shares and other investments. While these gains aren’t technically considered passive income, they are part of your total return and can be withdrawn and spent just as income can – or reinvested to try to compound your gains.
Investment returns are not guaranteed. However, over periods of many years, a well-managed portfolio of diversified investments tends to deliver an average return of between 4 per cent and 8 per cent, depending on your chosen risk level.
Get a free fractional share worth up to £100.
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Get a free fractional share worth up to £100.
Capital at risk.
Terms and conditions apply.
In some years, your returns may be higher. In other years, your returns may be lower, or even negative. So, you can’t plan for your Isa to consistently deliver a total return of £10,000 or more – but you can plan to consistently withdraw £10,000 a year with a reasonable expectation that your savings will not be exhausted in your lifetime.
How much do you need in an ISA to earn £10,000 a year?
Experts generally agree that, in normal market conditions, you can withdraw 4 per cent of a tax-efficient investment portfolio’s value every year without exhausting it.
On this basis, you’d need to reach an Isa value of £250,000.
Of course, this should be considered a guide rather than a hard-and-fast rule. Market conditions are rarely, if ever, truly normal so it’s sensible to prepare for a range of worse scenarios, or work with a qualified financial adviser to plan your withdrawals.
Currently, the Isa annual allowance is £20,000 a year. If you’re able to pay in £20,000 today, and then another £20,000 every time your allowance resets (starting on 6 April 2025), you’d exceed £250,000 in 2036 – or sooner, if your investments performed well.
For most people, it’s far more realistic to reach £250,000 by consistently contributing smaller, regular amounts, and staying invested.
Assuming an annual growth rate of 5 per cent, here’s how long it would take to accumulate £250,000 at different contribution levels:
- £1,000 a month – around 15 years
- £900 a month – around 16 years
- £800 a month – around 17 years
- £700 a month – around 19 years
- £600 a month – around 21 years
- £500 a month – around 23 years
- £400 a month – around 26 years
- £300 a month – around 30 years
It’s worth contrasting the fastest and slowest of these approaches.
Person A, at £1,000 a month, will contribute more than £170,000 before reaching their goal. Person B, at £300 a month – 70 per cent less – will reach the same goal in twice the time, but after contributing less than £110,000.
This is the magic of compounding: patience acts as a multiplier.
How should you invest your ISA to earn £10,000 a year?
When looking at periods of 15 to 30 years, the most reliable investment strategy is proven: choose a diversified portfolio of investments that aligns with your risk appetite, and stay invested through any market fluctuations that occur.
There’s no need to constantly monitor performance, take gambles, or add leverage – in fact, research suggests that historically the ‘set and forget’ approach has delivered better results for most investors.
That tends to involve simply reviewing your portfolio periodically, for example once a year, to ensure it remains aligned with your goals and risk appetite…and let time do the rest.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
