When I finally zip up my laptop and retire, I want the living to be easy and my income to be passive. I want it to roll in, free of tax. And I reckon the best way of generating a passive income in retirement, is to max out my annual £20,000 Stocks and Shares ISA allowance.
After all these years, it is easy to take ISA benefits for granted, but they’re absolutely brilliant. I can invest up to £20k a year – far more than I can actually afford – in stocks and shares of my choosing with no tax to pay HM Revenue & Customs.
I’m maxing out my £20k ISA
All the capital gains and passive dividend income I generate will be free of tax for life. No income tax, no capital gains tax. I can even pass on these amazing tax benefits to my partner when I die. Only when I’m sadly gone will HMRC get a shot at it, via inheritance tax.
That strikes me as a brilliant offer. All the other income I will earn in my life will be subject to both income tax and National Insurance. Worse, the tax and NI burden is going to get even greater, from April. That’s because chancellor Rishi Sunak has frozen income tax threshold for five years, and appears to be pressing ahead with his 1.25% NI levy for most workers.
While the income I earn from my day job is taxed to death, the passive income I generate from my ISA when I retire is tax free. I’m not sure that makes sense, that’s just how it is.
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.
It all only intensifies my desire to generate a passive income in retirement, mostly from investing in UK shares. I do have some exposure to global stock markets such as the US, Europe and emerging markets, via investment trusts and exchange traded funds (ETFs).
Passive income for me, tax-free
I love UK shares because they offer some of the most generous passive income in the world. Right now, the FTSE 100 yields 3.56%. That’s pretty impressive, given the rotten returns on cash. It would probably be higher still, if the UK economy wasn’t still in recovery mode following the ravages of Brexit, Covid and now Putin.
While I’m still working, I will passively reinvest my dividend income to buy more stock. And I will continue to do so until I reach retirement, at some point between in the next 15 years. After that, I will claim my State Pension and draw some personal pension, while doing my best to stay within the personal allowance.
Once I’ve hit that, I will start drawing tax-free passive income from my Stocks and Shares ISA. Of course, the shares I buy may not always rise in value and the dividend income isn’t guaranteed in the way that savings account interest is. But I still see such ISAs as too good to be true. One day, some cash-strapped Chancellor may agree with me, and slash the ISA allowance back. That gives me another great reason to max it out today.