Quitting work to live on passive income sounds like the ultimate dream, right? No more alarms or commutes – just dividends to cover the bills, and more.
That’s why many UK investors put their money into a portfolio of high-yielding stocks every month. To get the most out of your money, using a tax-free ISA can reduce the amount going to HMRC.
Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, and does not constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
But how much should you put away each month to generate an income like £21,000 a year?
Run the numbers
Income portfolios that chase high-yielding stocks often achieve returns between 6% and 8%. To make £21,000 a year, you would need £262,500 at 8% interest, or £350,000 at 6% interest – a huge sum, but something that can be achieved over time.
Let’s be generous and say you earn a slightly above-average total return of 10% per year (with dividends reinvested). A £500 monthly vehicle investment translates to around £303,283 after 18 years. At a 7% yield, a dividend of £21,229 is paid out.
Office for National Statistics data shows that the average full-time salary in the UK is £39,039 a year, or £2,600 a month after tax. If you can live on just £2,100 a month by cutting expenses, you can afford £500.
Of course, anything less than that will only take a few extra years, so the earlier you start, the better. But even investors in their mid-40s should have more than enough time before retirement.
Stock hunting
To achieve a 10% return, don’t just chase high returns, spread the risk by building a strong and diversified portfolio.
Here is one example of mixing growth and income shares across sectors including engineering, banking, insurance, real estate and retail.
| a company | Total annual returns | bear fruit (%) |
|---|---|---|
| Rolls Royce | ~19% | 1.2 |
| NatWest Group | ~14% | 5.7 |
| Legal and general (London Stock Exchange: Elgin) | ~9% | 8.7 |
| London Metric Property | ~6.6% | 6.5 |
| J Sainsbury | ~6.2% | 4.3 |
This combination has generated total annual returns of 11% since 2016, but the average return is a bit lower at 5.2%. To remedy this problem, you can consider more high payouts like Legal & General once the bet gets big enough.
Why legal and public?
Legal and General A FTSE 100 index An insurance giant with a long and reliable history of paying dividends. In 2025, it posted full-year earnings of 21.79p, up 2%, with analysts eyeing a potential return of 8.7% going forward.
The forward price-to-earnings ratio is 10.5, which is reasonable versus its ten-year average of 9.1, indicating fair value. Earnings grew by 9% in 2025, with 2026 forecasts at the high end of 6-9%.
These are typical characteristics of a sustainable income stock, not a growth leader.
But it is still risky in some ways. Interest rate fluctuations can hurt investment companies, credit spreads on bonds can widen, and longevity trends can strain pensions. Fortunately, the pension risk transfer business helps mitigate this risk.
Final thoughts
A passive income stream in retirement can spell the difference between surviving and thriving. It removes the stress about whether your pension will be enough and reduces the need to save.
But the reward doesn’t come easily. You must stick to the plan, do the research, and make the financial sacrifices. The most important step is the first step – start small in an ISA, stay diversified, and let the compound work.
Legal & General is a good example of the type of primary stocks to consider in an income portfolio. But conditions are constantly changing, so don’t get too comfortable and always be aware of new developments as they arise.
