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A Better Alternative To Pensioner Bonds

If they were dishing out prizes for the most popular investment of 2015, pensioner bonds would be the clear winner.

Hundreds of thousands of people have rushed to take out 65+ Guaranteed Growth Bonds since launch in mid-January, and it isn’t hard to see why.

The bonds pay a fixed rate of 2.8% before tax over one year, or 4% a year over three years. By comparison, the average cash ISA currently pays just 1.44%, according to Moneyfacts.co.uk.

The website and switchboard at National Savings & Investments, which administers the bonds, collapsed with the weight of demand.

Bonding With The Voters

Chancellor George Osborne has since extended the pensioner bond scheme for three months, until just after the general election in May. He reckons they are a real vote winner.

But where does this leave the under-65s, who are barred from taking out these bonds (yet still fund the cost through their tax bill)?

Virgin Territory

Cash won’t cut it. A market-leading fixed-rate cash ISA from Virgin Money pays just 1.70%, while the Post Office pays 2.10% over three years.

Most cash ISAs pay far less, while the average savings account pays just 0.66%.

Bricks And Mortar

One in three people heading for retirement are considering purchasing a buy-to-let property, according to research from Platinum Property Partners.

The average investor earned more than 11% from buy-to-let last year, through a combination of rental income and property growth.

But many won’t want the bother of hunting for properties, finding tenants, paying for repairs, chasing rental arrears, and so on.

Get Your Share

Buying stocks and shares is more straightforward. Once you have set up an online trading account, you can buy and sell in seconds.

Leading FTSE 100 companies such as BP, GlaxoSmithKline, National Grid, Royal Dutch Shell, Vodafone and (if you’re feeling brave) Tesco pay dividend income worth between 4% and 6% a year.

Plus you get the prospect of capital growth on top, if their share prices rise over the longer run.

Better still, you can invest in the stocks tax efficiently, through your £15,000 annual ISA  allowance. Returns from pensioner bonds and buy-to-let are both taxable.

Stocks and shares are riskier than government-backed pensioner bonds. But if you’re investing for the long term and understand what’s at stake, they should also be far more rewarding.

The FTSE 100 is packed with top stocks paying as much as 5% or 6% a year.

To find out how dividend-paying stocks can make you rich, download the Motley Fool's latest FREE wealth report How To Create Dividends For Life.

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The Motley Fool has recommended shares in GlaxoSmithKline and owns shares in Tesco.