How much would I need in an ISA for a £2k monthly passive income?

Through generous tax relief, Individual Savings Accounts (ISAs) can significantly boost our chances of making a large passive income.

I myself own a Cash ISA and a Lifetime ISA, in which I hold cash to reduce risk. They sit alongside a Stocks and Shares ISA that I use to buy shares, trusts and funds.

My tax savings give me more money to reinvest and compound wealth. Yet with savings rates on cash-based ISAs falling, leaving too much money in one of these low-yielding products could jeopardise my chances of retiring comfortably.

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.

Thinking about the future

None of us can be fully certain how much extra income we’ll need to live comfortably in retirement. It’s impossible to guess how large the State Pension will be a few decades from now, nor the age at which we’ll be able to claim this benefit. It’s also tough to predict what the future cost of living and social care will be.

That said, having a rough figure in mind can provide direction and motivation during the retirement planning process. With this in mind, I believe aiming for a £2,000 monthly passive income, in addition to the State Pension, could be a decent target to consider.

Executing a plan

There are various ways anyone could try to hit this figure. One option is to invest in high-yield shares, funds and trusts. This way, they could draw down a regular income while giving their portfolio space for further healthy growth.

Dividends are never, ever guaranteed. But someone with an ISA portfolio of £480,000 could achieve a £2,000 monthly passive income if they invested in assets with dividend yields of 5%.

A great fund

But what would be the best way of targeting a £480k portfolio? Buying US shares is a path I think’s worth serious consideration, given the S&P 500‘s average annual return of 12.5% over the last decade.

That’s far ahead of the 5.16% interest rate that the best-paying, easy-access Cash ISA (from Trading212) currently offers. Based on this, a monthly investment of £560 would be needed over 30 years to get to that £480,000 portfolio.

But as I said at the top, savings rates are dropping in response to falling interest rates, so that 5.16% return might not be around for long.

By contrast, investing in S&P 500 shares could require a much smaller monthly contribution to reach the same goal. If the index continues to deliver its historical 12.5% annual return, an investor would only need £123 a month to build that £480,000 portfolio.

While this return isn’t guaranteed, I’m optimistic a fund like the iShares S&P 500 ETF (LSE:CSPX) will continue to deliver double-digit yearly returns. This reflects the index’s high concentration of fast-growing tech shares (like Nvidia and Microsoft); a robust long-term outlook for the US economy; and likely interest rate cuts from the Federal Reserve.

By holding hundreds of large US multinational shares, the fund allows investors to balance risk while simultaneously chasing growth. As well as technology stocks, it also provides large exposure to financial services, consumer goods and healthcare companies.

It’s true that future returns could be impacted by new trade tariffs among major economies. Yet on balance, I believe considering putting more money in funds like this over a Cash ISA could be better for building long-term wealth.