How much do you need in an ISA or SIPP for a £33k passive income?

If you’re serious about making passive income, you need to consider opening an ISA or a SIPP. These popular investing and retirement products provide added financial firepower to build a portfolio and then draw income from it.

Both the Stocks and Shares ISA and SIPP protect users from tax grabs. Investors can buy a wide range of assets, allowing them to capture multiple wealth-creating opportunities while simultaneously managing risk.

Want to know how much you’ll need in one of these for a £33,000 retirement income? Read on.

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.

Tax benefits

By shielding individuals from income tax on withdrawals, ISAs allow investors to earn a significant second income with a smaller portfolio than otherwise required. This can shorten the time they need to reach their income goals, as well as reduce the size of the contributions required over time.

What’s more, protection from capital gains and dividend taxes can speed up long-term portfolio growth. This works by giving investors more cash to invest, accelerating the compounding process and helping them hit their target more quickly.

SIPPs also help individuals sidestep capital gains and dividend taxes, although income tax is charged on withdrawals. Still, the tax relief on contributions can more than offset this tax liability (as I’ll soon demonstrate).

By boosting contributions, compounding acts on a larger capital base, which over a period of decades can significantly outweigh any withdrawal taxes.

So how much do you need?

With an ISA, calculating how much you’d need for a £33k annual passive income can be a simple one. If you’re looking to rotate your portfolio into 8%-yielding dividend shares upon retirement, you’d need a nest egg worth just under £413,000. Since withdrawals are tax-free, every penny goes straight into your pocket.

With a SIPP, the amount sits higher at around £485,000. This assumes the State Pension already uses up your tax-free Personal Allowance, meaning 75% of withdrawals are taxed at the basic rate (25% of each SIPP drawdown is tax-free). To walk away with that £33k net, you’d need an actual gross income of almost £39,000.

But here’s the thing: the cost to you of building the portfolio would be between roughly £78,000 and £104,000, as the tax relief (of 20% to 40%) ensures your net contributions are lower than those of an ISA investor. That’s based on an average annual stock market return of 9% over 25 years.

Building a SIPP

But how achievable is that 9% return for investors? The answer is ‘very’ in my opinion, assuming investors build a diversified portfolio of stocks.

The HSBC S&P 500 ETF (LSE:HSPX) is an exchange-traded fund I’ve bought for my own pension to target such returns. By effectively holding hundreds off IS shares, I have exposure to a variety of multinational companies in different industries. This provides a stable return by balancing growth and dividends across the economic cycle, and helps me to manage risk.

Focusing on US shares could lead the fund to underperform if broader appetite for Wall Street stocks weakens. However, this hasn’t stopped it delivering excellent returns yet — over the last decade, it’s delivered an average annual return of 15%. This is thanks to its large contingent of high-performing tech stocks, which make up a third of the fund.

On balance, it’s a top asset for ISA and SIPP investors to consider.