There are more than 4,000 ISA millionaires in the UK, and I’ll bet they’re enjoying a nice second income from their profits.

Or they might still be re-investing the income from their shares to grow their pots further. The more we can build before we retire, the better.

I said shares, and I’m making an assumption. That our ISA millionaires have made it using a Stocks and Shares ISA, not a Cash ISA.

I’d be surprised it it was possible to reach such levels from Cash ISAs, even using the maximum allowance every year since the start.

No more tax

Gains from an ISA are free of tax. That might not make a lot of difference in the early years when our pot is building slowly.

But the top 50 ISA millionaires have an average of £8.5m in their accounts. Just imagine being able to cash all that in and not pay a penny in ISA 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.

ISA returns

So how might I get to my £16,400 in annual income? It’s all about using the full annual allowance, reinvesting dividends, and letting compound returns weave their magic.

Over a decade, Stocks and Shares ISAs have returned an average of 9.6% per year. That includes dividend income and share price gains.

Now, some years can be really bad. In 2019-20, Stocks and Shares ISAs lost an average 13%.

I suspect the long-term return is more likely to be around 6-7%, but that’s just a guess. Then again, I think the FTSE 100 is undervalued right now. So we might be in for a few more good ISA years.

I’m not going to make any predictions. So this is just — what if we get 9.6% per year from an ISA for the next 10 years?

Full allowance

Imagine we can use the full £20,000 ISA allowance and invest the cash in monthly portions. After 10 years at an annual 9.6% total return, we could have an ISA valued at £328,000.

What kind of second income might that generate?

I wouldn’t want to draw down too much and maybe leave myself short as I get older. I’d want my ISA to at least keep pace with inflation.

The UK stock market, over the long term, has averaged about 5% per year ahead of inflation. So maybe I could take 5% as income each year, and still have the rest keep up.

£1,300 per month

That would give me a bit more than £16,400 per year, or £1,360 per month. And that could make a nice second income for my retirement years.

Again, I must stress that this isn’t a prediction. It’s just me playing with a few numbers and asking, what if?

I really can’t say what actual return I might get in the next 10 years. But I’m convinced of one thing, that a Stocks and Shares ISA is my best chance of building up a nice nest egg.

And UK shares look about the best value they’ve been for a long time. That’s two things.

The post How to try and turn a £20k ISA into a £16,400 annual second income appeared first on The Motley Fool UK.

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More reading

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.