I’d invest £350 a month in a Stocks and Shares ISA to target a lifelong passive income

This year’s Stocks and Shares ISA deadline is fast approaching. UK investors have until April 5 to use the £20k free ISA allowance for this year.

Tax-free allowances for dividends and capital gains will drop significantly from April 2023. As a long-term investor, I therefore benefit from the tax shelter provided by ISAs.

My approach to investing is to put money into an account every month. My goal is to build the ISA into a dividend machine that will provide reliable second income. Here’s how I do this.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it become, any form of tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.

Keep it simple

I’m not trying to be too clever. I only want to buy proven businesses that are consistently profitable, with a track record of steady growth and reliable dividends to help build my nest egg.

For this reason, most of the stocks I see are from FTSE 100 with FTSE 250 index.

For example, Legal & General and Aviva Both have been in business for over 100 years and offer a dividend yield of over 7%. Tobacco is not everyone’s tea drinker, however British American Tobacco and Imperial brand both yield more than 7% and seem pretty safe to me.

Elsewhere, I am attracted to the defensive quality of consumer goods companies such as Unilever (3.8%) and health stocks like GSK (4%).

I have also dipped my password into the banking sector, with new purchases from NatWest Group (6.1%). In my view, UK banks look like a safe investment right now.

Number crunching

My plan is to continue to siphon some of my income into my ISA each month until I can retire. When I was still working, I reinvested all the dividends I received. By using them to buy more shares today, I hope to increase my income in the future by benefiting from the power of compounding.

To explain how I hope this will work, I have put together some example numbers.

The average annual return on UK stocks since 1900 has been about 9% per year. That’s the conclusion of a new report by Credit Switzerland. Returns vary from year to year, of course. But I have based my number on this figure I am looking at a long timeframe.

With a monthly investment of £350, I estimate that the ISA could be worth around £355,000 after 25 years.

Using a standard withdrawal rate of 4%, that would give you an income of £14,200. That’s 50% more than the current state pension of £9,628.

My strategy doesn’t always work for everyone. But, in general, I think the tax-free benefits of an ISA account mean it’s a good way to get started in the stock market today.