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Stocks and Shares ISA is one of the few ways to build a second income without handing over some of it to HMRC.
For example, a target of £1,850 per month is large enough to be meaningful, but realistic enough to be planned for over 20-30 years. Combined with the UK State Pension, this is enough to provide most people with enough to live comfortably later in life.
Not only would this cover a immense proportion of the normal cost of living in the UK, it would fill the gap on the Living Pension and keep pace with inflation in the long run.
From April 6, the full up-to-date state pension will be £241.30 a week or £12,547.60 a year. For those without a workplace pension, this would not be enough without additional sources of income that could really make a difference.
Sure, we’re not talking about luxury money here, but it would certainly make life easier.
The next question is: how much does it actually take to build it?
Calculating compound returns
Here are some examples using realistic averages to eventually get to the point where the ISA returns £1,850 a month in passive income.
| Time frame | Average return (is) | Monthly contribution required |
|---|---|---|
| 20 years | 7% | £541.52 |
| 20 years | 8% | £485.12 |
| 30 years | 7% | £235.02 |
| 30 years | 8% | £195.97 |
These numbers assume regular monthly investment and cumulative growth based on market averages, but do not guarantee results. However, they provide good estimates of why time is so critical.
The longer you invest, the less you have to deposit each month. Investors with less time may need to pursue higher returns, although this may escalate risk.
So how can you aim even higher?
Choosing stocks vs. index funds
One way to achieve higher income is to pick individual stocks instead of buying an index fund. This can boost profits, but it also increases risk because an individual company could cut its dividend or disappoint earnings.
Therefore, a portfolio of individual choices should always contain a diversified mix of 10-12 stocks from different sectors.
Legal and general‘s (LSE: LGEN) is a good example of a popular stock that income investors should consider. It has become more severe recently dividends by 2% to 21.79p, while pledging to return over £5 billion to shareholders between 2025 and 2027.
On May 8, it completed the purchase of 16,869,889 ordinary shares in the first part of a £1.2 billion repurchase diagram. It also has a 42-year dividend history, which gives investors confidence in its current payouts.
Apparently, the company draws inspiration from legendary investor Benjamin Graham, who once said:
“If managers have no idea what else to do with their money, they should pay dividends. If they have good places to invest it, that’s much better.“
Still, dividends are never guaranteed, and insurance and pension companies are sensitive to markets, interest rates and capital rules. Therefore, investors should always pay attention to returns and capital strength.
The most critical thing
For a beginner building an income ISA portfolio, Legal & General is the type of company to consider when looking for a long-term dividend producer (i.e. not a get-rich-quick company).
Share buybacks, growing dividends and solid solvency support the investment case. However, the stock still deserves monitoring because financial companies can move quickly when markets change.
I would see this as a reasonable income investment in the UK, provided it is included in a diversified portfolio rather than following a full plan.
Mark Hartley owns shares in Legal & General
