I’ve been investing inside my Stocks and Shares ISA allowance for so long that I assume everybody knows the advantages, but of course they don’t.
Buying shares inside an ISA allows me to build a tax-free pot of money for my retirement, without having to pay a penny of income tax or capital gains tax on my returns.
No money? I’d open a Stocks and Shares ISA
This means that when I stop working, I can draw income from my portfolio to top up my pensions, entirely free tax. I don’t even have to mention my ISA on my tax return.
If I had no savings at 40 and was starting from scratch, I would buy a couple of investment trusts — a vehicle whose job is to invest in shares — just to get the hang of it.
I’d start with a low-cost fund investing in a spread of UK blue-chips, such as the City of London Investment Trust, which has an annual yield of 4.92%. Then I’d widen my net by investing in a broad-based international investment trust, such as Monks Investment Trust or F&C Investment Trust.
Next, I’d move on to stock picking. At The Motley Fool, we favour buying individual FTSE 100 stocks over funds, as we believe this should deliver superior returns over time. There are plenty of exciting stocks on the index that pay high levels of income, and that’s where I’d begin my hunt.
I’d start by investing in utility stock National Grid. This has a low-risk profile because its earnings are regulated, and it offers a steady yield of 4.92% a year, plus capital growth if its shares rise.
Then I would invest in stocks with a similar profile, but across different sectors, to further spread my investment risk. Insurance company Aviva is high on my FTSE 100 stock shopping list, because it yields attractive income of 6.41% a year.
Only buy shares for the long term
It also looks cheap, as its shares trade at just 10.7 times earnings (as a benchmark, 15 times is seen as fair value). I recently bought shares in Lloyds Banking Group, which are even cheaper, trading at 7.1 times earnings. It currently yields 3.93%, but this is forecast to hit 5.2% next year.
Mining stocks listed in London are a great source of both dividends and growth. I’d choose either Anglo-American or Rio Tinto, which yield 6.56% and 10.18%, respectively. I might also invest in a housebuilder like Barratt Developments or Taylor Wimpey, which yield 7.92% and 7.22% respectively.
These stocks are just a hopping off point. There are plenty more FTSE 100 stocks to consider, including BAE Systems, Diageo, Tesco and Unilever.
I’d always do research into each stock as they have both sector and company-specific risks, including those I’ve mentioned. And I’d never buy shares that I didn’t plan to hold for at least five years (ideally 10, 15, 20 years or longer). That gives my reinvested dividends time to compound, and shields me from having to sell after the stock market crashes.
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.
