National Savings and Investments has unveiled the rates for its new income bonds for over 65s – dubbed 'pensioner bonds' – before they go on sale in January 2015.
In his March Budget, chancellor George Osborne said the pensioner bonds would pay a rate of 2.8% for the one-year and 4% for the three-year bond before tax (2.24 and 3.2% after tax respectively). Tax will be deducted automatically at 20%, regardless of the individual's marginal rate.
The current market-leading rate for bonds is 1.85% for one year and 2.5% for three years.
By comparison, the NS&I Direct Isa pays 1.5%, equivalent to 1.87% for a basic rate taxpayer, 2.5% for a higher rate taxpayer and 2.72% for an additional rate taxpayer.
But Laith Khalaf, senior analyst at Hargreaves Lansdown, warns that switching out of your Isa to buy a pensioner bond may not necessarily be the best move.
"Taking money out of tax-free savings to put into taxable savings is counterintuitive. The tax benefits of an Isa are cumulative, so it will be a rare set of circumstances where this is a good thing for long-term savings.
"Withdrawing money from an Isa loses that Isa wrapper for good, and while interest rates within cash Isas look pretty unappealing right now, this won't be the case forever. Savers may also want to retain their Isa wrapper to move to a stocks and shares Isa at a later date, as their financial circumstances change."
Other potential drawbacks are that the NS&I bonds do not pay a regular income and cannot be held within an Isa.
Patrick Connolly, financial planner at Chase de Vere, says: "To be of most value, pensioner bonds would be allowed within a cash Isa and be capable of paying a monthly income, even if savers had to accept a slight lower interest rate in order to receive this. This would make them far more helpful for pensioners trying to generate income from their cash savings."
If you want to get in on this, you should act fast. Khalaf says: "There is a budget of £10 billion set aside for these bonds and given the expected interest rates and that these may be the only time these bonds are offered, I would expect them to sell out very quickly, within weeks rather than months."
You can only put a total of £10,000 in each bond, or £20,000 if you take out a one-year and a three-year bond.
Caroline Abrahams, charity director at Age UK, says: "At this time of historically low interest rates, we welcome the recognition that most pensioners have limited or no opportunities to top up any savings. Yet in order to have a cushion against unexpected expenses such as repairing the boiler, savings need to keep up with inflation.
"We hope these pensioner bonds will help give older people in the UK, many of whom worry about making ends meet, a small amount of financial security."
This article was written for our sister website Money Observer