No savings at 40? Here’s how I’d start investing in a Stocks and Shares ISA

I’ve been investing in a Stocks and Shares ISA allowance for so long that I assume everybody knows the advantages, but of course they don’t.

Buying shares in an ISA allows me to build a tax-free pot of money for retirement, without having to pay a cent of income tax or capital tax in return.

Don’t have money? I will open a Stocks and Shares ISA

This means that if I stop working, I can draw income from my portfolio to supplement my pension, tax free. I don’t even have to mention ISA on my tax return.

If I don’t have savings at 40 and start from scratch, I will buy a couple of percados investment – a vehicle that projects to invest in shares – just to get a hang of it.

I would start with a low-cost fund investing in UK blue chip spreads, for example City of London Investment Trust, which yields an annual yield of 4.92%. Then I will widen my net by investing in broad international investment trusts, for example Monks Investment Trust or F&C Investment Trust.

Next, I will move on to stock picking. At the Motley Fool, we favor buying individuals FTSE 100 shares over funds, because we believe this should deliver superior returns over time. There are plenty of exciting stocks in the index that pay high levels of income, and that’s where I’ll start looking.

I would start by investing in utility stocks National Grid. It has a low risk profile because its earnings are regulated, and it offers a fixed yield of 4.92% per annum, plus capital growth if the stock rises.

Then I will invest in stocks with the same profile, but in different sectors, to spread the investment risk. Insurance companies Aviva high on the FTSE 100 Stock shopping list, because it generates an attractive income of 6.41% in the year.

Only buy stocks for the long term

It also looks cheap, as shares trade at only 10.7 times earnings (as a benchmark, 15 times is seen as a fair value). I recently bought shares in Lloyds Banking Group, which is even cheaper, trading at 7.1 times earnings. It currently yields 3.93%, but this is predicted to reach 5.2% next year.

London-listed mining stocks are a great source of dividends and growth. I will choose one Anglo-American or Rio Tinto, which yields 6.56% and 10.18%. I might invest in a house like that Barratt’s Development or Taylor Wimpeywhich yields 7.92% and 7.22%.

This stock is just a hopping point. There are more FTSE 100 stocks to consider, including BAE System, Diageo, Tesco and Unilever.

I always do my research on each stock because they have sector and company risks, including those already mentioned. And I won’t buy a stock that I don’t plan to hold for at least five years (ideally 10, 15, 20 years or more). That gives the reinvested dividends time to compound, and protects me from having to sell after a stock market crash.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it become, any form of tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.