Here’s how much an investor needs in an ISA to generate a £32,000 second income

Most people invest in a Stocks and Shares ISA with the goal of eventually generating a second income — whether in retirement or earlier. The idea is to grow a portfolio that can help support a desired lifestyle, either through dividend income or strategic withdrawals (or both). 

According to the Office for National Statistics, the average post-tax annual earnings are just over £27,000 in the UK. Since we don’t know what that figure will be in future, I’m going to use £32,000 for simplicity’s sake.

Here’s how this sum might be achieved through investing in the stock market.

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.

Lofty yield

The average dividend yield for FTSE 100 stocks right now is roughly 3.5%. Based on this yield, an investor would need £858,000 in an ISA to generate £30k a year in tax-free dividends. That’s unlikely for most people.

However, there are plenty of UK shares yielding significantly higher than the average. One I’ve been considering and think others should too is M&G (LSE:MNG), the asset management firm whose shares come with a juicy 9.4% yield.

The stock has drifted sideways for the last couple of years as higher interest rates have led investors to prefer cash and other products over M&G’s funds. Last year, it experienced £1.9bn in net outflows from open business, a reversal from the £1.7bn inflows in 2023.

However, assets under management (AUM) actually increased 1% to £346bn, due to positive market moves offsetting outflows. And lower costs helped drive a 5% year-on-year increase in adjusted operating profit before tax (£837m).

The risk here is that uncertainty around tariffs could spark further market turmoil and hurt investor sentiment. This volatility might lead to clients pulling cash from M&G’s funds, impacting AUM and profitability.

Yet the company is demonstrating resilience in a tough market, which is important to see from an income perspective. Management expects annual underlying operating profit growth of 5% or more on average over the three years to the end of 2027. 

In its 2024 results, the firm said: “Given our confidence in the outlook for the business, we are moving to a progressive dividend policy, starting with a 2% increase in the 2024 total dividend per share”.

Moving to a progressive dividend policy is obviously encouraging. For 2026, City analysts forecast 3% dividend growth, bringing the payout to 21.2p per share. That translates into a mouth-watering forward yield of 9.7%

Getting to £30k (and beyond)

Of course, it’s important to remember that dividends aren’t guaranteed, making diversification crucial. But through stocks like M&G, it’s possible to build up a sizeable portfolio over time.

In fact, a £642,000 portfolio is achievable by investing £800 a month for 21 years. This assumes a 10% annualised return (which may not happen), including dividends reinvested along the way to fuel the compounding process.

Investors would then be generating just over £32,000 in annual passive income, assuming the ISA yielded 5%. If the portfolio yield was 7%, the yearly second income would be almost £45,000.

Invest £1,000 a month for 25 years at the same rate of return, the figure would be £1.23m. And the passive income figures would be £61,500 and £86,000 for 5% and 7% yields, respectively.

This goes to show how investing relatively modest sums of money over time can lead to a sizeable second income.