A Stocks and Shares ISA is a great way to build a pool of wealth to generate long-term passive income for retirement. An ISA wrapper protects all capital gains and dividend income from tax, meaning every pound can grow freely without HMRC having to take a cut.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Creating a second income of £2,000 a month or £24,000 a year is possible but takes time. Taking a 4% ‘protected withdrawal rate’ as a guide, your ISA pot should be around £600,000. If an investor built a portfolio generating a dividend income of 6% per annum, they could reduce this to £400,000. However, I think it is always worth aiming high.

That’s a huge number, but spreading your donations over your working life can make it possible. If someone saves £500 a month (£6,000 a year) and the ISA grows at an average of 7% a year, they will achieve the higher target of £600,000. pounds in about 30 years. This assumes that they will reinvest all of their dividends today to buy even more shares.

FTSE 100 dividend stocks

My own ISA leans towards solid dividend payers FTSE100including Phoenix Group Holdings (LSE:PHNX). It has one of the highest rates of return in the blue chip index and is 8.2%. That’s about twice what I could get in cash, plus the potential share price appreciation. Of course, there are more threats. Dividends are never guaranteed because companies must generate enough cash to fund them.

Phoenix generated operating cash of £1.4 billion in 2024, up 22% on the previous year. In June, the company reported a £3.6 billion Solvency II surplus and a capital ratio of 175% in June, which forms the basis for the dividend. A very high rate of return always comes with some risk, and yet Phoenix has increased shareholder payouts for nine years in a row. Over the past decade, the average growth has been 3.02% per year. It didn’t always keep up with inflation, but at least it was consistent.

I would expect dividend growth to sluggish to around 2% per year from here, which still looks fair if inflation subsides.

Changes in share valuation

The stock fell 3.3% after the last session. FTSE100 wobble. This seems modest given the anxiety swirling around the markets today. Shares are up about 32% in 12 months. After dividends are reinvested, the total return exceeds 40%.

That’s a pretty good result for a company that many see as remaining blue-chip rather than rapidly growing. If interest rates continue to fall, reducing cash and bond yields, Phoenix’s yield will look even more attractive, which could attract more investors.

There is a risk. Phoenix manages almost £300 billion of assets to meet long-term liabilities, and a stock market correction would be painful. I don’t expect the share price to continue rising at its current pace, so investors may only consider buying with the long-term in mind. This also gives those dividends time to compound and grow.

Diversification matters. Different sectors change at different times and a broad portfolio of stocks and shares Isas makes this journey easier. With patience, a clear plan and an emphasis on long-term growth, your monthly goal of £2,000 will come much closer. There is no time to waste and as the FTSE 100 falls, shares are rising.