Want an annual tax free income of £30,000? Save via an ISA.

Laura Suter
26 March 2019

•        Saving for 21 years is enough to generate a tax free annual income of £30,000 without selling any of your investments
•        The funds & trusts yielding over 4% to give you income and capital growth

The fact withdrawals from ISAs are tax free makes them an ideal way of saving to generate an income to supplement pensions or earned income. Assuming a 4% dividend yield, you’d need a pot of £750,000 in order to generate a tax free income of £30,000 from an ISA without eroding the value of your investment. On the same basis, an income of £20,000 could be generated from a pot of £500,000 and £10,000 could be taken tax free from a fund worth £250,000.

Assuming you put the maximum ISA allowance of £20,000 into your ISA each year and a 5% investment return each year after fees, this is how long it would take to reach those pot sizes: 

Annual income

Pot needed

Years to reach pot

Final ISA amount

£10,000

£250,000

10

£264,136

£20,000

£500,000

16

£496,807

£30,000

£750,000

21

£750,104

Source: AJ Bell. Assumes a 4% yield for income, and 5% total return after fees for growth of pot. Assumes full £20,000 ISA subscription every year.

Source: AJ Bell. Assumes a 4% yield for income, and 5% total return after fees for growth of pot. Assumes full £20,000 ISA subscription every year.

Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“Once you’ve managed to get enough ISA money together, what can you invest in that will pay you the required income? The FTSE 100 is yielding just shy of 5% at the moment, so buying a cheap FTSE 100 tracker fund would get you the required level. But there are lots of other options to get to the crucial 4% too. 

“Looking at the list of investment trust ‘Dividend Heroes’ is a good place to start, as it’s the list of trusts that have handed investors a dividend increase for the past 20 years or more. Investment trusts have the ability to hold over some of their profits from each year to supplement their income in leaner years, making them reliable income payers. There are 20 trusts on the list, although some don’t meet the yield target. 

“One potential option is the City of London Investment Trust, run by Janus Henderson fund manager Job Curtis. The fund currently yields 4.5%, and has a sterling track record of increasing its dividend for the past 52 consecutive years – the longest of any fund on the list. Curtis mainly invests in the UK stock market, aiming to get a balance between capital growth and income and also between companies that will perform well in different market cycles. Current holdings include dividend stalwarts oil giant BP, pharmaceutical company GlaxoSmithKline and British American Tobacco.

“Another option from the Dividend Hero list is the £575m fund Murray Income Trust, which is currently yielding 4.4%. This trust was launched in 1923, so has been through a fair few market cycles, and has increased its payout to investors every year for the past 45 years. The trust is also trading on a more than 7% discount at the moment. It’s another UK-focused fund, with big stakes in consumer goods giant Unilever and drinks firm Diageo.

“In the funds space, another UK-focused option is Evenlode Income, run by Hugh Yarrow and Ben Peters. This fund yields 4.4% at the moment and has returned 12.6% to investors over the past three years. The fund has mainly income-generating large companies among its holdings, with 40 investments in the £2.5bn portfolio.

“Looking outside the UK, for investors who want to diversify their income streams, the JP Morgan Emerging Markets Income fund reaches the yield target, delivering 4.27% income at the moment. The £312m fund is focused on getting investors a high level of income but also growing capital, and has outperformed its target index over the past one, three and five years, during a tricky time for emerging markets. Among the 90 holdings, almost a quarter are in China while there’s also a big chunk in Taiwan. 

“Another option for those wanting to diversify away from stock markets is the Artemis Strategic Bond fund. This £1.4bn fund has the ability to invest in different bonds, from high yield to investment grade, and across different companies and sectors. It is currently yielding 4.05% and has delivered a return of 4.27% over the past five years, highlighting that the fund is more focused on income that capital growth.” 

Funds and Trusts currently yielding over 4%:

Fund / Investment Trust

Current yield

City of London (IT)

4.5%

Murray Income (IT)

4.4%

Evenlode Income

4.4%

JP Morgan Emerging Markets Income

4.3%

Artemis Strategic Bond

4.1%

Average

4.3%

Laura Suter
Personal Finance Analyst
Laura Suter is personal finance analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.
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