Here’s how much I would need from an ISA to get £10,000 of income a year

When preparing to build an income stream, there are a few things to consider. One of the most important is the type of savings account to use.

Many UK residents use a Cash ISA to reduce the tax they pay on their capital gains. While this can be a good option, falling interest rates leave it less attractive.

In the long run, I think it makes more sense to consider a Dividends and Shares ISA. It offers similar tax relief with benefits to beat the benefits of a Cash ISA.

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

So what are we talking about?

It’s usually best to save one per month. But it’s still important to get a firm idea of ​​how much is enough. Investing a few pounds here and there is unlikely to produce life-changing wealth – but that doesn’t mean investors need to hide every penny they have in their ISAs.

Everyone has different needs when it comes to financial needs. So, for the sake of a better number, I’m using £10,000 of annual income as an example. That would be more money than the State pension.

To put down £10k a year for 30 years, a pot of £300,000 is needed. However, with the money invested and you get a return, the amount may be less.

Using an average return of 5%, a pot of around £200,000 can last forever (5% of £200k is £10k). But annual benefits are not stable and some years may need to reduce the pot. In addition, inflation may require larger withdrawals each year.

With that in mind, I would consider £250,000 a reasonable goal to aim for. This is also related to the 4% reduction in pension funds.

Building a portfolio

A quarter of a million pounds is no small sum to save. It would take a decent portfolio around 25 years to reach that amount with £200 invested a month. That’s assuming an average return of nearly 6% with an average of 4% for dividends reinvested.

The consumer goods giant Reckitt Benckiser (LSE: RKT) would be one to consider. It has provided an annual return of 6% annually for the past 20 years and currently has a dividend yield of 4%. Also, it has a strong track record of reliable payouts and consistent dividend growth.

But past performance is no indicator of future results. Will it continue?

To find that, I look at its risk and rating.

Reckitt rose to prominence last year after acquiring baby food business Med Johnson. One of its products, Enfamilhe was involved in a case involving the death of an infant. Although that problem has reportedly been resolved, there is always the risk of similar cases arising.

Acquisitions are important to growing a business but can be costly if things go wrong.

On the other hand, the price drop makes it look attractive. A recovery has begun but the price remains down 37% from its five-year high. With earnings expected to improve, analysts are predicting an average price increase of 14.21% next year.

That’s why I consider it a good option as part of a passive strategy. I will be constantly adding to my Reckitt position as the year progresses.