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Forget the Premium Bonds rate cut! I’d rather invest in a Stocks and Shares ISA anyway

As if savers weren’t having a hard enough time, government-backed National Savings & Investments (NS&I) has made it even tougher to get a decent low-risk return.

NS&I is slashing rates on a host of its saving products and making it harder to win a prize on Premium Bonds, which strengthens the arguments in favour of putting your long-term savings into a Stocks and Shares ISA instead.

From May, one of the six £100,000 Premium Bond prizes, one of the 12 £50,000 prizes, and more than 145,000 prizes worth £25 will go. In total, 173,718 of the 3.47 million prizes will disappear. This reduces the chance of winning a prize from an already meagre one-in-24,500, to an even more desperate one-in-26,000.

Good luck with those odds. The Premium Bond prize right now works out as a return of just 1.3% a year. Ouch.

Heading towards zero

As if that wasn’t bad enough, NS&I is also slashing rates on its Fixed-Interest Savings Certificates, Guaranteed Growth Bonds and Guaranteed Income Bonds, as well as its Direct Saver, Investment Account and Income Bonds.

The rate on its Direct Saver will fall from 1% to 0.7%, while its Investment Account falls from 0.8% to 0.7%. There is bad news for income seekers, with Income Bond rates falling 45 basis points from 1.15% to 0.7%,

NS&I said the rate cuts will align its offerings with its competitors, and “strike a balance between the needs of its savers, taxpayers and broader market stability”. It isn’t wrong, because its competitors offer a dismal return also.

Time to look elsewhere

This is bad news for older savers, who like NS&I because it is 100% guaranteed by the government, but there is a price to pay for this security.

If safety is your priority, you might just have to swallow these rate cuts, or find a market-leading Cash ISA, where the first £85,000 of your savings also have government protection, under the Financial Services Compensation Scheme.

However, if you are in a position to take a bit more risk, you should try a more rewarding approach of investing in the stock market instead, as this should provide a superior return over the longer run.

Do it through a Stocks and Shares ISA instead of the cash variety and any gains will be tax-free forever, whether those gains are about capital growth or the income you receive.

Get 7% instead

Right now, the FTSE 100 index is full of shares offering yields of between 5% and 6% a year, and some dividends will give you even higher income than that. Alternatively, you could invest in a FTSE 100 tracker offered by iShares, Vanguard and many others, spreading your risk and yielding 4.24% a year currently, with capital growth on top if share prices rise.

That’s an easy way to tap into the FTSE 100 without needing to research individual shares.

Shares are volatile in the short run, but history shows that in the longer run they generate an average return of around 7% a year. Left for as long as possible, the gains can be substantial. You should invest money for five years at the very least, and leave it to grow untouched for as long as you can.

And after the latest news from NS&I, the arguments in favour of shares is even more compelling.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned 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.