Unprecedented demand for UK's 'pensioner bonds' shows the fierce appetite for achieving a better return on investment than cash in the bank. The latest inflation figures put back any hopes of a near-term interest rate hike, so cash deposit accounts are going to remain off the menu for the foreseeable future given their paltry returns. That speaks to continued popularity for bonds and equities.

Massive demand

With rates of up to 3.2% (after tax) on the pensioner bonds, it is easy to see why more than £1 billion worth were sold in the first two days since launch earlier in January. The bonds are hugely attractive to individuals who want peace of mind that their money is safe and earning some interest. They may argue there's no risk involved at all. Nonetheless, pensioners using the bonds are themselves taking on risk which may not be immediately obvious.

Yes, the money is fully protected - the bonds are issued by National Savings & Investments which is backed the Treasury - but investors risk other interest rates rising while their money is locked away.

The 3.2% best rate (after basic-rate tax) for the bonds is available if you are aged 65 or over and agree to lock your money away for three years. The question prospective investors should ask themselves is whether they believe UK base rates will move from 0.5% at present to more than 3% by 2018. If so, cash ISA accounts could offer a greater return.

No-one knows if that will happen and current signs suggest interest rates will rise very gradually, so the bonds could well remain competitive for their entire three-year life.

If you are a higher-rate taxpayer, the maximum rate available from the pensioner bonds is 2.4% after tax. You can already get a better return through some five-year fixed-rate cash ISAs such as 2.5% from Virgin Money. The term is two years longer but this might be a suitable choice for someone who wants to lock their money away. A one-year pensioner bond is also being offered by NS&I but a basic-rate taxpayer only gets 2.24% (after tax).

A new study from the International Longevity Centre UK implies that most people approaching retirement want to use their pension pot to secure a guaranteed income rather than spend it on fancy holidays or a new car. The pensioner bonds certainly fits well with this analysis, but there's a drawback in that interest is only paid once a year - and even then it is only added to your initial savings and cannot be accessed until the end of the three year period (for the 36 month term product).

Look to equities

Anyone searching for regular income, and/or not old enough to qualify for the pensioner bonds, should look at the stock market where there's plenty of stocks and funds that offer significantly higher yields - lots between 5% and 8% - and pay dividends quarterly or monthly.

The Association of Investment Companies, a body that promotes the investment trust industry, says 82 of its members pay dividends every three months to shareholders, nearly twice as many as five years ago. Among those paying monthly dividends include F&C Commercial Property (FCPT) and TwentyFour Select Monthly Income (SMIF). Equipment leasing fund SQN Asset Finance (SQN) is among the investment collectives set to start paying monthly cash rewards to shareholders in 2015.

No-one should buy a fund or stock simply because it pays regular dividends - you must always research each product thoroughly to understand its strategy, financial health and opportunities. That's one of the benefits of reading Shares every week as we do the hard work and continuously look for dividend opportunities that are analysed in the magazine and website, giving you insight into stocks and funds so that you can then undertake your own research and make an informed investment decision.