The British pound is placed on a chart to show the economic cycle

Image source: Getty Images

An annual allowance ISA is an opportunity to build income by investing in stocks and shares.

The allowance determines the amount you are allowed to save each year in a Stocks and Shares ISA. Today it is £20,000. But the government can change the rules at any time. And future annual bonuses may not be as high, or may even be higher.

Tax benefits

But one thing I am sure of is that investing in stocks and shares in an ISA is a good idea. The tax benefits are compelling. Dividends received from shares in an ISA are tax-free. And the capital gains from the shares are also tax free. But on top of that, there is no secret when I withdraw money from an ISA. Indeed, the amount released is free of income tax.

These are attractive benefits. But income tax is normally paid on the money invested in the ISA. In other words, there is no tax relief in the way there is with a Personal Invested Pension (SIPP).

However, I want to put as much money as possible into the Stocks and Shares ISA each year. And although the limit is £20,000, I can choose to invest as much, or as little, up to that limit.

And, right now, the terms of the investment and distribution are among the best I have seen in the investment profession. The recent bear market for many stocks has disrupted valuations and share prices. However, many companies are reporting strong sales and promising results. And on top of that, economic and geopolitical news has improved.

So, as soon as the money is in my ISA, I start investing straight away. And the goal of my strategy is to get a steady lifetime income from dividend payments.

Build a bigger investment pot

However, before withdrawing the dividend income, my investment needs to grow. And that’s because I don’t claim the income right now. But it will come in handy later, perhaps in retirement. So, during that time I will reinvest all the profits and dividends in my portfolio to increase the value of my money.

A bigger investment pot can lead to bigger income later on. Although good results are not guaranteed. Businesses can face labor problems at any time. And it is possible to choose the ‘wrong’ one at first

However, my strategy will have two parts. First, I invest in a variety of stocks and manage money. And the goal is to match the performance of the general stock market.

In one example, America S&P 500 index has posted an annual return of around 10.5%. And this figure covers the index’s performance since the mid-1960s.

However, for the second part of my strategy, I will invest in shares of individual companies. And the goal is to beat the performance of my investments and investments.

Good results are not guaranteed. But I plan to mitigate some of the risk by doing a lot of research before I buy my stock.

The post How I can invest £20,000 in an ISA for a lifetime passive income appeared first on The Motley Fool UK.

More reading

Please note that tax treatment depends on the circumstances of each customer and may change in the future. The content of this article is for informational purposes only. It is not intended as any form of tax advice. Readers are responsible for performing their own due diligence and obtaining professional advice before making any investment decisions.

Kevin Godbold has no position in the said part. The Motley Fool UK has no position in any of the shares mentioned. The views expressed in the companies mentioned in this article are those of the author and therefore may differ from the official recommendations of our subscription services such as Share Advisor, Hidden Winners and Prof. Here at The Motley Fool, we believe that considering a variety of perspectives makes us better investors.

Motley Fool UK 2022

Source link