How much do you need in an ISA or SIPP to target a passive income of £2,000 a month?

Generating a passive income from an ISA or SIPP can be a game-changer in retirement. Building enough wealth to generate a second income worth £2,000 a month, or £24,000 a year, could make someone’s final years fun rather than a financial challenge.

Growing your pension portfolio

Investing inside a Stocks and Shares ISA gives investors tax-free dividends and capital gains, while withdrawals are also free from income tax.

By contrast, a Self-Invested Personal Pension has the huge advantage of upfront tax relief on contributions, plus 25% tax-free cash on withdrawlas. However, any further withdrawals may be liable to income tax.

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.

Using the classic 4% withdrawal rule, generating a £2,000 monthly income would require a pretty meaty pot of around £600,000. By steadily contributing into a diversified portfolio and reinvesting dividends, reaching this figure can be achievable, but it will take time and effort.

It would require a £900 monthly investment over a 25-year term, a figure that assumes an average annual growth rate of 7%. With 40% tax relief in a SIPP, this would only cost a higher rate taxpayer £540. Even investing smaller amounts could still build up a sizeable retirement pot though.

NatWest shares are flying

FTSE 100 bank NatWest Group (LSE: NWG) has done a terrific job of generating dividend income and share price growth lately. Its shares have risen a remarkable 66% in the last year, and 363% over five. All dividends are on top.

The trailing dividend stands at 3.92%, but that’s expected to hit 5.44% this year and 6.08% in 2026. With £600,000 invested, that could translate to around £36,480 annually, or just over £3,040 a month.

However, I would never recommend investors put all their money into one stock. It would leave their retirement at the mercy of a single company’s fortunes. Personally, I have a portfolio of around 15 different FTSE stocks plucked from different sectors, and with varying income and growth potential.

While NatWest has done well, no stock rises in a straight line forever. Its market cap is now £44bn, so the growth surely has to slow. There are rumours that banks could face a windfall tax in the November Budget, which wouldn’t help. If the Bank of England cuts interest rates, that will squeeze NatWest’s net interest margins, and profits.

Long-term compounding

However, NatWest looks decent value and a candidate for further research, despite its recent run, with a price-to-earnings ratio of just over 10. That’s comfortably below the FTSE 100 average of 15. I think it’s well worth considering today, although investors should take a long-term view, as there will be ups and downs along the way. There always are.

FTSE 100 and FTSE 250 stocks, growth stocks and dividend payers all have a role to play in steadily building wealth. By starting early and staying committed, investors can enjoy rising passive income and greater financial security in retirement. For those willing to plan and stick with it, the long-term rewards can be significant.