How much would an investor need in an ISA with £800 in monthly income?

I hesitate to say that anything is ‘no brainer’ when it comes to investing. However, I think this is certainly the case when it comes to opening a Stocks and Shares ISA. Doing so means that the investor will not be taxed on any profits they make or dividends they receive.

So, exactly how much money would one need to deposit into this account to generate £800 of monthly income? However, that partly depends on how much they have to invest and how long they plan to stay invested.

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.

Average performance, good results

Let’s assume that an investor can save £20,000 for a maximum ISA allowance of £20,000 in Year 1. Let’s also assume that they were able to generate a 7.5% return on their portfolio every year. As it turns out, that’s roughly the long-term average performance of FTSE 100 (including assignments). Of course, the past is no guide to future returns. But it’s probably the best gauge we have.

Throwing all that into my trusty calculator gives me a pot of around £130,000 after 25 years. Moving into a large dividend-bearing stock and earning a yield of 7.5% would generate £9,724. Spread over 12 months, this is a smidgen over £800 a month to add to any other income (perhaps a pension).

Before the herd

Naturally, a lot of thinking is done here. That monthly income won’t look too good for a quarter of a century either. We can thank the destructive power of inflation for that.

On a more positive note, the example assumes that £20,000 is invested once and nothing else. If the investor wants to speed things up, he may consider putting more money to work in the following years. They can also try to beat the market by hunting only the best growth stocks that money can buy. This can include wealth at a rapid rate.

As it happens, this is an FTSE 100-listed strategy Scottish Mortgage Investment Trust (LSE: SMT). Although the last three years or so have been difficult, its share price has outperformed the index over the long term.

Much of this can be attributed to buying some of the biggest technology stocks in the world before every investor and their dogs decided to do the same. Think about it Tesla in 2013, when it was trading at around $6 a pop. As American markets closed last night (January 6), that same stock was changing hands at $411. And it only takes investing in a few incredible winners like this one to make a difference.

Lots of possibilities!

Of course, someone who relies on all their hard-earned money with one manager can be a recipe for disaster if their choice doesn’t work out. And the market has some concerns that Scottish Mortgage’s penchant for holding stakes in hard-to-value private companies could come back to bite them (and the owners) if the economy takes a turn for the worse.

For this reason, I think it’s worth considering stocks that may be flying under the investment trust’s radar or are too small to consider buying a stake. And I think there are quite a few smart opportunities in our UK stock market that are priced right now!