How much money do you need in an ISA to generate £2,000 a month in UK shares?
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UK shares pay one of the best dividends in the world making them a great way to build a second retirement income. When held within a Stocks and Dividends ISA, investors receive all that income tax-free, and capital gains are tax-free. So how much money do investors need to withdraw?
Let’s say someone wants an income of £2,000 a month in retirement from their ISA. One yardstick that is widely used is the 4% rule. This suggests that investors can withdraw that percentage of their pot each year, without a dip in capital. Apply here and the required ISA pot comes out to £600,000. That’s a small amount, but it gives us a clear target to aim for.
Converting dividends into cashflow
I think income investors can do better than 4% by focusing on dividend paying stocks. High yielding variety spread FTSE 100 again FTSE 250 shares may yield about 5.5% per year. At that level, the income target drops significantly, with £24,000 needing around £435,000 instead.
Building such a pot requires patience rather than investment. Let’s take the case of a 30-something with £20,000 already invested. If they pay an extra £200 a month, and their investment delivers an average return of 7% per annum, they will have £656,000 by the time they are 67.
Lloyds shares offer growth and dividends
One stock to consider for both dividend income and share price growth Lloyds Banking Group (LSE: LLOY). After years in trouble following the financial crisis, the bank has rebuilt its balance sheet and reputation. Shares are up 80% in the past year, as revenue, profit and cash flow rise.
That strong run has pushed the trailing yield down to around 3.25%, however I expect that to increase over time as Lloyds increases shareholder payouts by around 15% a year. That comfortably beats inflation, meaning investors aren’t just getting a higher return, but an annual increase in real terms. Forecasts suggest that the yield could reach 4.2% by 2026. Just remember that benefits are not guaranteed.
Lloyds is more expensive than it used to be. The price-to-earnings ratio rose to 18, although it fell to a more modest 11.5 on earnings.
Playing the long game
The wider UK economy still looks weak, which could weigh on Lloyds as it focuses more on the domestic market. Falling rates could squeeze net interest income, hitting profits, but as Halifax’s biggest mortgage lender, Lloyds could benefit from any mortgage recovery.
Lloyds’ share price is unlikely to rise at the same pace in 2026. It may even go down. However, short-term price changes matter less than steady progress over many years. On that basis, I think Lloyds should be considered as part of a broad money oriented portfolio.
The key is to spread the money across multiple companies. Diversification makes it easier and keeps revenue flowing when one sector is struggling. Start early, reinvest dividends, and stay focused on the long term. Do that, and a monthly income of £2,000 from an ISA starts to sound achievable. This is a new year. Time to get stuck.
