Here’s what I would need from an ISA to get £1,000 of passive income a month

We would all like to have a monthly income to supplement our pensions in retirement, right?

If it’s tax-free, even better. There is no tax to pay on interest from a Cash ISA, for example. But with Bank of England rates falling, I expect we will soon return to 1% interest rates or below. I’d rather pay tax with a better return than save tax on that much money.

Fortunately, there is a way we can aim to get the best of both worlds, using a Shares and Shares 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.

High returns

For over a century, the UK stock market has outperformed other investment options. In the last 20 years, the total per year FTSE 100 gains reached 6.9%. That includes share price gains and dividends.

It was still tense though. In the 2019-2020 financial year, the average Shares and Shares ISA made a loss of 13.3%. And I thought it would be worse, seeing how the first days of the epidemic were going.

Investing in stocks really requires a long-term perspective. For investors who are not comfortable with taking short-term losses, perhaps they should keep their money elsewhere. There is nothing wrong with caution. Those of us looking for stocks can help reduce our risk by seeking diversification.

How much would we need in an ISA to make a 6.9% annual return worth £1,000 a month? I think it should take a pot of around £174,000. And if we wanted to take cash only from the profits (say, 4% per annum on average), we would need £300,000.

Assignments

I see four key components to a strategy to achieve our passive income goals. Start early, invest as much as we can each year, last as long as possible, and reinvest all our gains.

But what makes a good profit? A high yield is great, but only if it can be maintained. I would like a lower current yield, but based on a long track record of going up. Look Murray Income Trust (LSE: MUT), for example.

An investment trust that aims to combine increasing dividend income with capital growth. It does so by investing in stocks like RELX, AstraZeneca, National Gridand a list of others. So there is a variation of just one purchase.

At the moment, the trust has a predictable dividend yield of 4.6%, I would need around £261,000 to earn £1,000 a month at that rate. More importantly, it has increased its profits for 51 consecutive years.

Cover the accident

The 10-year price performance has not been good, sadly. It puts the shares at a 12% discount to underlying assets, which may make them look good value – but will reflect investor uncertainty.

Perhaps the market has been disrupted by a managed trust abrdnwhose share price performance has been negative?

Obviously there is danger here. But I think long-term investors looking to build income would do well to consider holding investment trusts like these in their ISAs.