Best alternatives to Pensioner BondsWhich? explores your savings options

16 May 2015

elderly woman smiling with piggy bank

Time’s up to invest in the government-backed ‘Pensioner Bonds’, which were closed for sale at midnight last night.

The National Savings & Investments (NS&I) products, which were only available to over-65s, proved immensely popular. More than 825,000 people invested £10bn in the first eight weeks alone, according to official government data.   

The fixed-rate savings accounts offered market-leading rates of 2.8% AER over one year and 4% AER over three years, up to a maximum investment of £10,000 into each type of bond.

Nevertheless, there are alternatives if you missed out. 

Cash Isas

The cumulative tax benefit of a cash Isa is still attractive for savers of all ages, and there are even a couple of deals that will offer better returns than Pensioner Bonds, provided you're a higher-rate taxpayer. 

Currently topping the Which? Money Compare one-year fixed-rate Isa tables are Al Rayan Bank and Punjab National Bank, both offering rates of 1.9% AER. However, the rate from Al Rayan Bank is an 'expected profit rate' from its Sharia compliant investments, and so returns are not guaranteed. 

Punjab National Bank also offers the best rate in our three-year fixed-rate Isa table, paying 2.3% AER.

The overall annual limit for new Isa deposits increased to £15,240 at the start of this tax year. This limit can be made up of cash, or stocks and shares, or a mixture of both.

Which? Money Compare Table - Fixed-rate cash Isas - hundreds of deals compared 

Stocks and shares Isas

If you're happy to invest money in the stock market, you can still use an Isa wrapper to protect yourself from tax on most profits earned.  

Unlike Pensioner Bonds, your capital is at risk and returns are based on the performance of the market or the funds you choose, not a fixed rate of interest. 

That means the value of your investment could go up or down and you could lose more money than you put in. But, if you’re comfortable with risk, it's potentially very rewarding over the long term and offers significant tax advantages. You may want to seek independent financial advice when investing in this type of product.

Find out more: Stocks and shares Isas explained - learn more about the pros and cons of this product 

Savings accounts

This autumn sees the introduction of a new personal savings allowance, entitling every basic-rate taxpayer to earn £1,000 per year in savings interest (reduced to £500 for higher-rate taxpayers) before paying any tax. This will boost the returns offered by traditional savings accounts. 

For now, it’s impossible to beat the rates offered by Pensioner Bonds.

Punjab National Bank currently tops the Which? Money Compare Tables for both one-year and three-year fixed-rate savings accounts, offering a one-year fix paying 2% AER and a three-year fix paying 2.55% AER.

Which? Money Compare Table: Fixed-rate savings accounts - hundreds of deals compared

Current accounts

Many high street providers are paying current account customers decent interest rates for staying in the black. 

Nationwide’s FlexDirect account pays 5% AER on balances up to £2,500 for the first year, for example, while Santander pays 3% AER on balances between £3,000 and £20,000 to holders of its 123 current account.

The downside is that you normally have to meet a certain criteria to qualify. Often, you must pay in a set amount each month – ranging from £500 per month to £1,500 per month. Some providers also require you to set up a number of direct debits and register for internet banking/paperless billing. 

Find out more: Making the most of high interest current accounts - some clever money-making tips

Peer-to-peer lending

Peer-to-peer lending is an increasingly popular alternative to traditional savings. Established platforms, including RateSetter, Zopa and Funding Circle, allow you to lend money to individuals or small businesses while cutting out the overheads levied by traditional lenders. 

These platforms offer savers favourable rates, commonly ranging from 5-7% AER over five years. 

There's an increased risk of losing capital if a borrower fails to repay what you have leant them, although most major peer-to-peer lenders have compensation schemes to cover you in this scenario. 

Also, bear in mind that your money won't be covered by the Financial Services Compensation Scheme (FSCS) if your choice of peer-to-peer website goes bust. 

Find out more: Peer-to-peer lending websites reviewed - we review the major lenders 

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