See how a 45-year-old could target a £4,313 monthly passive income by maxing out their ISAs

The Stocks and Shares ISA is a brilliant way of generating passive income on top of the State Pension. 

Investors who put away as much of their £20,000 limit as they can afford each month can turbocharge their retirement savings. Even late starters can build huge sums, provided they put their backs into it.

Although returns from shares aren’t guaranteed, over the longer run, history shows they do better than cash. Albeit with volatility along the way.

Let’s be clear though, this won’t happen overnight. Investors shouldn’t try to build quickfire wealth by throwing a heap of cash at the next big thing. It’s much better to build a diversified portfolio offering both share price growth and dividend income.

HSBC is a top dividend payer

A 45-year-old investor still has more than two decades before State Pension age. This gives them time to build a substantial portfolio, although they shouldn’t waste it. 

FTSE 100 dividend stocks can be an attractive option. They provide regular cash payouts, and if reinvested, those dividends can compound over time. That’s on top of any growth when the share price rises.

One stock that stands out to me as worth considering is HSBC Holdings (LSE: HSBA). This global banking giant is forecast to yield 5.9% this year, rising to 6.25% in 2026 as the board lifts payouts.

HSBC has been in strong form, rewarding investors with billions in share buybacks alongside dividends. Better still, the share price is up 40% in a year, although there’s no guarantee this will continue.

Despite its stellar performance, it remains reasonably valued, I feel. Its trailing price-to-earnings (P/E) ratio is just 9.1, making it look cheap relative to earnings.

However, its price-to-book (P/B) ratio sits at 1.1. That’s higher than rivals like Barclays, which trades at just 0.6. This suggests HSBC may not be the absolute bargain it once was.

It faces geopolitical risks too, with one foot in China and another in the West. Those risks aren’t going away any time soon. That’s why diversification is key.

Dividends, growth and share buybacks

If an investor maxed out their £20,000 Stocks and Shares ISA allowance and secured an average dividend yield of 5% from shares like HSBC, they’d receive £1,000 in dividends over the next year. Plus share price growth on top.

But that’s just the start.

Historically, the FTSE 100 has delivered total returns averaging 6.9% per year, with dividends reinvested.

If a 45-year-old consistently invested their full ISA allowance every year until they hit 67, they could build a pot worth a staggering £1,034,977.

Assuming an average dividend yield of 5%, that could generate an annual passive income of £51,748, or £4,313 per month.

Of course, not everyone can max out their ISA. But even smaller investments can lead to a significant passive income stream.

For example, investing £300 per month for 20 years at an average 6.9% return could build a pot of £186,296. That could generate a second income of £9,315 a year with a 5% yield, or around £776 a month.

With the right strategy, private investors can build a passive income for the future. As the annual ISA deadline looms there’s no time to lose.