Interest rates for the new pensioner bonds have been released by The Treasury.
Pensioner bonds are government-backed investments paying much higher rates of interest than standard high street saving accounts offered by many banks and building societies.
The 12-month bonds will pay an annual rate of 2.8%, while 36 month bonds will pay 4%.
Savers who qualify for the bonds must be aged 65 years old or over and cannot invest more than £10,000 in each bond – so a pensioner couple can set aside a maximum £40,000 of savings.
The bonds will be available from NS&I, the agency that runs the UK premium bond and national savings services for the government.
Savers should be able to invest from January 2015. The minimum investment is £500 per bond.
Around a million pensioners are expected to switch their cash savings from banks and building societies into the bonds.
Chancellor of the Exchequer, George Osborne said: “Launching these bonds is a key part of our initiative to overhaul pensions and to support individuals to save money at each stage of their life, not just when they are working.
“These bonds will be at the best interest rates available and will give pensioners more certainty over what they can receive as a fixed income from their savings and the peace of mind that they are maximising their cash over the term of the investment.”
Financial firms offering savings products have grumbled about competition from the government as savings rates have tumbled between Budget 2014 in April, when the Chancellor announced the bonds and now.
The current savings best buys are 2.25% over 36 months from Investec Bank for a minimum deposit of £25,000 and 1.5% over 12 months from Aldermore for a minimum £1,000 investment.
Income tax is due on interest paid on pensioner bonds.
NS&I will pay interest annually with basic rate tax deducted. Higher rate taxpayers will have to pay any additional tax due through their tax returns.
Financial firm Hargreaves Lansdown suggests the over 65s should first invest their cash in a tax-free ISA, and then the balance in the pensioner bonds.
“That way, they take advantage of their tax-free allowances first and can shelter the rest in the bonds,” said a spokesman.
“The Chancellor promised top rates and he has made this happen. We expect these bonds to sell out extremely quickly ads pensioners switch their cash from banks and building societies.”