Following the recent fall in interest rates, some savers with £1,000 in a demand deposit account are earning as little as £2.00 per annum at a time when inflation is eroding the value of their savings by around £25 a year.

But there are a number of alternatives for depositors who are less than happy with such paltry returns. Few of the alternatives allow them the instant access to their cash provided by the demand deposit but they offer a more constructive way of managing money.

Those getting a niggardly return on their savings could consider using it to pay off loans. Financial advisers particularly recommend clearing any high-cost short-term debt such as credit cards on which interest is charged at more than 20 per cent. Those without such loans could consider paying off part of their mortgage.

"Paying off your mortgage is not a bad idea as people are paying interest on their mortgage at a greater rate than the money they are earning on deposit," says Mr Michael Keane, general manager, marketing at EBS Building Society.

However, mortgage holders must stipulate that they are applying the sum against the capital rather than the interest on the mortgage. Only variable mortgage rate holders are in a position to do this when they choose. Those on fixed-rate mortgages have to wait until their term expires before they can pay off part of the capital borrowed while all mortgage holders should factor in the tax relief on interest payments that they are getting when deciding how much to pay off.

Those who like the idea of using their savings to provide them with some borrowing capacity as well as a generous return could consider depositing their money with a credit union. As well as earning a return which is currently above that available from conventional financial institutions, credit unions allow depositors to borrow a multiple of the amount saved through the credit union.

Meanwhile, those who need instant access to their cash should shop around for the best deposit rates on offer as these can vary quite considerably. Pfizer Bank, for example, is currently paying 4 per cent for demand deposits, well above the 0.2 to 0.25 per cent available from most financial institutions. The bank, which is based in the International Financial Services Centre (IFSC), is part of the Pfizer pharmaceutical group and will accept deposits of £50 upward.

Accounts with 30-day or 90-day notice periods currently offer better rates than demand deposits although financial advisers doubt they will continue to deliver such high returns after the next round of official interest rate reductions.

"We are advising people to approach these with caution as they are variable rates and if the Central Bank moves rates again, they could be cut," says Mr Douglas Farrell, director of National Deposit Brokers.

The other downside of such accounts is that savers must be prepared to notify the financial institution in advance of their intent to withdraw cash. In an emergency, savers can generally get their hands on the cash but may have to pay a penalty to do so or otherwise see the interest paid on their account revert back to the basic demand deposit rates.

Depositors who do not already have a special savings account (SSA) also have the option of availing of the more favourable tax terms applying to such accounts. SSAs are taxed at 20 per cent rather than the higher standard rate of 24 per cent and often enjoy a higher rate of interest than ordinary accounts.

While some financial institutions will only open 30-day notice accounts for savers with a minimum of £3,000 to £5,000 to deposit, some offer such accounts to those with less. Among them are EBS, First Active, ICS, AIB and An Post which offers a rate of 3.5 per cent on sums up to £4,999.99.

Those who can afford to lock their money away for a fixed term could consider the one or two-year accounts offered by a number of institutions although term deposits usually require a minimum investment of £3,000 to £5,000.

For those with this longer investment horizon but just £1,000 to invest, the tax-free State-guaranteed savings certificates and savings bonds offered by An Post merit consideration.

The savings bonds, which have a minimum investment requirement of £100, yield 12 per cent tax free over a three-year period, the equivalent of an average annual rate of return of 3.85 per cent tax free. The savings certificates - in which a minimum of £50 must be invested - deliver 25 per cent tax free over a five-year, six-month period or an annual average of 4.14 per cent if held for the full term.

Prize bonds, which offer the purchaser the chance to win tax-free cash prizes without the risk of losing the original sum invested, are another option for depositors.

The bonds do not guarantee a return but given the low rates of interest on offer in demand accounts, some savers may like the idea of having a flutter in the hope of scooping the big prize.

There is a weekly star prize of £15,000 and a monthly prize of £100,000 and the company promises that the identity of the winner will remain confidential.

The Prize Bond Company estimates that a £1,000 holding gives the owner a better than one-in-six chance of winning a cash prize every year which makes them an interesting alternative to the low-yielding demand deposit account.

However, financial advisers warn that to achieve capital growth of any sort, people have to move their money off deposit. Anyone happy to take their savings and let them sit for a period of at least three to five years should consider longer-term equity-based investments, they say.