I am always looking for new ways to boost my passive income from investments. I believe investing in equities is one of the best ways to create a steady income.
Combined with the tax-efficient nature of a Stocks and Shares ISA, the strategy could be twice as effective.
ISAs are a great tool to invest in the market because any income or capital gains earned on assets held within one of these wrappers are not liable for tax.
This suggests I could generate a tax-free passive income by investing and saving in 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.
Stocks and Shares ISA investing
According to my calculations, I only need to invest £50 a month to generate a passive income from equities. A figure of £600 a year might not seem like much, but thanks to the power of compound interest, this could become a significant sum in the long run.
According to my calculations, if I can achieve an average annual return of 10% on my money, I calculate I could have a nest egg worth £40,000 after 20 years of saving.
This is only a ballpark figure. I cannot assume I will generate a 10% return indefinitely.
Nevertheless, I believe it clearly illustrates the wealth-creating power of equities in the long run. If I were to increase my monthly deposit to £500, I think I could accrue a near £400,000 investment pot after two decades of saving.
This is entirely compatible with a Stocks and Shares ISA as investors can deposit £20,000 a year into one of these investment accounts. This figure of £500 a month is only £6,000 a year.
Using the entire allowance of £20,000 a year with a 10% per annum return could produce a £1.3m investment pot within 20 years.
Still, as I touched on above, success is not guaranteed with this approach. Equity markets can be pretty volatile. If they fell 50% in a single year, it could take me several years to recover from these losses. There is also no guarantee I will learn 10% per annum. The actual figure could be a lot more, or a lot less. There is no way of telling.
Passive income strategy
Despite these challenges, I believe this strategy is one of the best ways to create a passive income. By investing £50 a month, I could build a nest egg worth £40,000 after 20 years. If I then switch from growth investing to income investing, I could earn a 7% per annum return on my money, based on current dividend yields.
Once again, this figure is only designed to illustrate the potential return available. There is no guarantee I will be able to invest in stocks yielding 7%.
But if I can, I could turn my investment lump sum of £40k into an annual passive income of nearly £3,000. This income would be tax-free if generated by assets in a Stocks and Shares ISA.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
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