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Passive income is the holy grail for many investors, as it offers a real chance of enjoying a comfortable retirement. The Stocks and Shares ISA is one of the best places to generate it. All capital growth and dividends inside the wrapper are free from tax, which helps wealth grow more quickly over time.
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.
Every tax year, investors can put away up to £20,000 in an ISA. But how much is required to generate a tax-free income of £1,750 a month in later life?
Shares compound and grow
This is where the 4% withdrawal rule comes in. It suggests that taking 4% of a retirement pot each year should ensure the pot lasts for life, rather than running dry. To generate £21,000 a year, the ISA would need to be worth around £525,000.
That’s a hefty sum, but with regular contributions and long-term reinvestment of dividends, it’s not impossible. An investor who tucks away £650 a month and achieves an average annual total return of 7% could get there in 25 years. Starting early and giving time for contributions to compound and grow can mean the difference between modest savings and a serious retirement income.
Bellway: FTSE 250 recovery stock
One stock I’ve been watching closely is Bellway (LSE: BWY). It’s a housebuilder that has been hit hard by high mortgage rates and stretched affordability. Over the last 12 months, its share price has dropped 26%. In fact, it’s currently trading around the same level as a decade ago.
Yet, it’s showing signs of progress. On 12 August, Bellway reported completions up by 14.3% to 8,749 homes, slightly ahead of guidance. It expects to build 9,600 homes in 2026, while the average selling price last year was £316,000, up from £307,909. The government’s planning reforms should help, although the system remains slow and young buyers still face affordability barriers. Patience is required here.
The stock currently trades at around 17 times earnings. That’s not screamingly cheap, but it’s decent value given the growth prospects. The trailing yield is 2.74%, but forecasts suggesting that will hit 2.88% in 2025 and 3.32% in 2026. In contrast to cash, income from shares should rise over time, provided management can keep generating the cash to fund it.
Building a balanced portfolio
The housing sector still faces challenges. Another rate cut this year looks increasingly unlikely, employment data is weak, and affordability pressures haven’t gone away. Yet for patient investors, Bellway’s mix of a solid land bank, operational strength, and rising dividend potential makes it worth considering as part of a diversified portfolio.
The bigger lesson here is not to rely on any single stock. A portfolio that blends income-focused shares with growth potential can help deliver both rising dividends and capital appreciation, tax-free in a Stocks and Shares ISA.
Reaching £525,000 won’t be easy, but with discipline and most of all, time, it’s an achievable target. The earlier the journey begins, the more chance there is of achieving that £1,750 a month second income. Or with luck, more.
