George Osborne has announced that pensioners will soon be eligible for higher savings rates through a new range of bonds issued by National Savings and Investments (NS&I).
The government-backed savings institution will be offering £10billion of specialist Pensioner Bonds offering fixed savings rates of 2.8% over one year and 4% over three.
The over-65s will be able to invest a maximum of £10,000 in each bond, meaning a couple could invest a total of £40,000; while the new bonds will be available from January 2015.
The proposed rates are streets ahead of the best rates available on the market at the moment. One of the current best buys over one year, for example is First Save's 1.9% product. Over three years the best buy is just 2.7% from Icici Bank.
Many younger savers have been able to beat low interest rates by investing in the stockmarket, but this is often not an option for cautious retirees who are looking to generate an income from their cash without putting their capital at risk.
Commenting on the announcement, Patrick Connolly, IFA at Chase De Vere, said: "Cash savers have definitely had a rough time of it over the last five years and in doing this the Chancellor is putting the needs of savers first."
However, given the increase in the cash Isa allowance to £15,000, savers will need to do their maths to work out where best to keep their money.
Unless they have already used their Isa allowance savers will need to compare the difference in rates between the taxed pensioner bonds and untaxed Isas for cash savings.
A rate of 4% for example would be worth 3.2% after basic rate tax or 2.4% for higher rate taxpayers. A 2.8% rate would become 2.24% for a basic rate taxpayer or 1.68% for a saver paying the higher rate.
Halifax is currently paying 2% on an 18-month fixed-rate Isa, while Nationwide is paying 2.25% on its three-year fixed rate Isa.
Sue Hannums, one of the founders of Savingschampion.co.uk welcomed the announcement and said that the rates were well above what is currently available.
“ It should be noted that these are predicted rates due to apply from January and of course this may give an indication of the direction which the Chancellor sees interest rates moving in, as much as their current competitiveness. This could help to boost competition it the market and in turn boost interest rates which is something that has been desperately lacking in recent years”