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For UK investors, earning a tax-free second income is pretty easy when leveraging the power of an ISA. With all capital gains and dividends protected from taxes, it’s possible to build stock market wealth significantly faster than a general investment account.
And given enough time, a portfolio can eventually reach impressive levels that generate equally impressive passive income.
So how large does a Stocks and Shares ISA need to be to generate an extra £750 each month passively? And how long will it take to reach this threshold?
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.
Crunching the numbers
Earning £750 a month is the equivalent of £9,000 a year. And following the 4% withdrawal rule requires an ISA portfolio to be worth around £225,000.
Needless to say, that’s not exactly pocket change for most people. But the good news is, by drip feeding a small amount of capital each month into an ISA and growing it in line with the stock market’s long-term average, investors can build to this target over time.
When starting from scratch, investing £500 a month at an 8% annualised rate will grow an ISA to £225k in around 17 years.
Let’s speed things up
Waiting around for 17 years is obviously less than ideal. But there are some clever strategies that investors can use to drastically shorten the timeline. And one of the most popular is stock picking. This approach comes with more risk and requires a lot more discipline, diligence and research. But it also opens the door to market-beating returns.
Looking at UK shares over the last 10 years, anyone who spotted the growth potential of Antofagasta (LSE:ANTO) has discovered this firsthand. Including dividends, the mining giant has delivered a staggering 971% total return since February 2016. That’s the equivalent of a 26.8% annualised return – enough to transform £500 a month into just shy of £300,000!
Still worth considering?
As one of the largest copper producers worldwide, Antofagasta is seemingly perfectly positioned to capitalise on the global structural supply deficit for the red metal.
With modern technologies like cars, energy infrastructure, and data centres driving up demand for copper, production’s struggling to keep up. Even with numerous new discoveries, ore grades are proving lower than those of existing mining sites. And with older projects reaching the end of their life, copper prices are steadily rising creating a powerful secular tailwind for this business.
The company is seeking to capitalise on this commodity price momentum by increasing its own production volumes. And providing that the metal price remains strong, that could present a significant boost to both revenue and earnings, paving the way for more market-beating returns.
However, this is far from guaranteed. Even with the global supply constrained, demand may still falter if AI-related spending slows or economic recessions begin to emerge in major copper-consuming markets like China, North America, and Europe. And with Antofagasta shares already carrying a premium valuation in anticipation of incoming growth, such disappointments could spark some significant share price volatility.
Nevertheless, this mining enterprise still holds some exciting growth potential, in my mind. So for investors seeking to build a portfolio to generate a long-term second income, Antofagasta might be worth a closer look.
