Money Insider: Smart alternatives to the pensioner bond

It was no surprise to see the huge demand for the National Savings & Investments (NS&I) 65-plus bonds when they were launched last week; savers have had a tough time during the past few years.

More than £1.1bn of the allotted £10bn was snapped up in the first couple of days and even though NS&I had taken on additional staff, neither the website nor phone lines were able to cope.

The level of demand may have caught the provider and Government by surprise, but it simply highlights the demand for half-decent savings returns.

If you don't qualify due to age or you've invested the maximum with NS&I, there are other ways to earn more than the miserly 0.5 per cent, or less, being paid by many bank and building society savings accounts. The NS&I one- year pensioner bond pays 2.8 per cent AER, which equates to 2.24 per cent for a basic-rate taxpayer and 1.68 per cent for a 40 per cent taxpayer.

The three-year version pays 4 per cent AER (3.2 per cent for a basic-rate taxpayer and 2.4 per cent for a 40 per cent taxpayer).

The only standard savings products that beat 2.8 per cent gross are fixed-rate bonds with a term of at least five years. If you're happy to lock some of your cash away until 2020, then you can earn 3.03 per cent AER with Secure Trust or 3 per cent AER from Clydesdale Bank and Yorkshire Bank.

If you haven't used your annual tax-free savings allowance, a cash Isa paying anything above 1.68 per cent for a 40 per cent taxpayer or 2.24 per cent for a basic-rate taxpayer will beat the return on the one-year NS&I pensioner bond.

You can earn 1.7 per cent in a one-year fixed rate Isa from Virgin Money or 1.95 per cent AER for a two-year lock-in with the Post Office. For a longer term you can earn 2.2 per cent tax-free with Nationwide Building Society for four years or 2.5 per cent for a five-year fix from Virgin Money.

Another option is to open a current account where there's an opportunity to earn a good return while also having the flexibility to access your cash without penalty.

Some of the best accounts include Santander 123, paying 3 per cent AER from £3,000 to £20,000; TSB Classic Plus pays 5 per cent AER but is limited to a maximum balance of £2,000. Other options include Tesco Bank offering 3 per cent up to £3,000 or Lloyds Bank (Club Lloyds), which pays 4 per cent on balances from £4,000 to £5,000.

There is also the Nationwide Building Society FlexDirect account, which pays 5 per cent up to £2,500 but only on a one-year introductory deal; the rate falls to only 1 per cent from year two onwards.

There are other bank accounts that offer you the chance to open a regular savings account paying an attractive rate of interest. They're not suitable for lump sums, but useful if you want to drip-feed money from a savings account paying a poor interest rate. M&S Bank, First Direct and HSBC Advance all offer an account paying 6 per cent on monthly savings.

Finally, you may be interested in taking a look at peer-to-peer investing. It's an area that's growing fast – both RateSetter and Zopa now have around £30m invested every month. RateSetter has been running for four years and in that time every investor has got back every penny that they lent.

Currently RateSetter's rate is 4.7 per cent; Landbay 4.4 per cent; Zopa 4 per cent; Lending Works 5.0 per cent; and Funding Circle 6.3 per cent.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk