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Forget 1.16% from NS&I Income Bonds. I’d put my long-term savings in a Stocks & Shares ISA to build wealth

In the current low-interest-rate environment, in which savings rates are absolutely abysmal, everyone is looking for new ways to earn a better return on their money. NS&I Income Bonds are one savings product that is getting a lot of attention right now.

Are NS&I Income Bonds a good investment?

They currently pay an interest rate of 1.16% AER. Interest is calculated daily and added to your account on the 5th of each month or the next working day if the 5th falls on a weekend or bank holiday.

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Now, in the current environment, 1.16% is actually a pretty good return on a ‘relative’ basis. There aren’t many other savings accounts paying that level of interest at the moment.

But let’s get serious for a minute. For long-term savings, 1.16% is a terrible interest rate. Invest £10,000 at that rate and you’re looking at interest of less than £120 per year.

Realistically, if you’re earning 1.16% on your long-term savings, you’re likely to go backward financially in the long run once you factor-in inflation.

Earn that kind of interest rate on your savings for 10 years, and you’ll most likely find that when you come to spend your money, it buys you a whole lot less than you expect. That’s because prices of goods and services will have soared while your savings will have stagnated.

So, for long-term savings, I don’t think NS&I Income Bonds are a great option. You see, 1.16% per year is simply not high enough to generate real wealth.

Build your wealth with a Stocks and Shares ISA

If you’re serious about building your wealth, I’d forget about NS&I Income Bonds, and instead, park your long-term savings in a Stocks and Shares ISA.

A Stocks and Shares ISA won’t generate a high return on your savings by itself. But the investment options within this ISA certainly have the potential to do so.

You see, within the Stocks and Shares ISA, you have the option to invest your money in a wide range of fantastic wealth-building investments including funds, investment trusts, ETFs, and stocks. These kinds of investments are likely to create far more wealth for you over the long term than NS&I Income Bonds.

The choice you have within a Stocks and Shares ISA really is incredible.

For example, you can put your money into a global growth fund such as the highly-popular Fundsmith Equity fund. This particular fund has turned £10,000 into around £50,000 in less than a decade.

Or you can put your money into an investment trust that pays out regular income such as Murray Income Trust. This trust, which has increased its dividend every year for over 20 years, currently sports a dividend yield of about 4.4%

Alternatively, you can put together your own shares portfolio and invest in the companies you know and love. Whether you want to invest in a well-established FTSE 100 company like Diageo (which owns a wide range of spirit brands including Johnnie Walker, Smirnoff and Tanqueray) or a smaller, up-and-coming company such as Fevertree Drinks, it’s possible through a Stocks and Shares ISA.

And the best bit? All your gains will be completely tax-free. 

For long-term savings, I see the Stocks and Shares ISA as a no-brainer.

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Edward Sheldon owns shares in Diageo and has a position in Fundsmith Equity. The Motley Fool UK has recommended Diageo. 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.