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New pensioner bonds are to carry market-leading interest rates, the government has announced.

The one-year bond will pay an annual interest rate of 2.8%, and the three-year bonds will pay 4%.

Only those aged 65 and over are eligible to invest in the bonds, which are scheduled to be launched in January.

Investment will be limited to £10,000 in each bond, making a maximum of £20,000 per individual.

Even though savings rates have fallen since plans for the bonds were announced in March, the Treasury has kept to the rates it predicted at the time.

"These are absolutely market-beating rates, and I expect them to fly off the shelves," said Danny Cox of Hargreaves Lansdown.

The Pensioner Bond was a Budget promise from the chancellor, following lobbying from charities. They argued that pensioners who had relied on the income generated from their life savings were particularly hard hit by more than five years' of record low interest rates.

Those investing the maximum allowed will get a return of £280 on their one-year bond before tax, £95 more than they could get from the best equivalent bond currently available.

Pensioners investing the maximum £10,000 in a three-year bond will earn £1248 before tax, £480 more than they could get elsewhere.

Tax

However, investors will be subject to tax on the earnings from their bonds, reducing the headline gains.

For those paying basic rate tax, 20% will be deducted from the interest they earn, reducing the return on a one-year bond to £224, and on a three-year bond to £991.

Higher rate tax payers will need to pay extra.

The interest on both bonds will only be payable at the end of the term, and anyone wanting to take their money out early will lose 90 days interest.

However, non-taxpayers will be able to reclaim their tax through an R40 form, available from National Savings and Investments.

Even allowing for the fact that the returns will be taxable, they still offer better rates than cash Individual Savings Accounts (Isas), which are tax-free.

The best one-year Isa offers a return of 1.75%, and the best three-year account offers 2.15%.

Pensioner bonds v best in market Provider Rate Return on £10k before/after 20% tax NS&I Pensioner Bond 1 year 2.8% AER £280/£224 First Save 1 year bond 1.85%AER £185/£148 NS&I Pensioner Bond 3 year 4% AER £1248/£991 Shawbrook Bank 3 year 2.5% AER £769/£612 source: moneycomms.co.uk

The government has limited the issue to £10bn, and expects one million pensioners to buy them.

They will be sold on a first-come, first-served, basis, so it is likely that many pensioners will be disappointed.

"The rates are very competitive, so that's why I expect them to be oversubscribed," said David Braithwaite of Citrus Financial.

The minimum investment will be £500, and the bonds will be available by post, by phone, or online.

No date has yet been given for when people can apply, but more information is available from the NS&I website.