Media playback is unsupported on your device Media caption George Osborne: "Backing savers is part of our long-term planning"

A government-backed pensioner bond offering competitive rates of up to 4% interest is to be offered for a further three months, George Osborne has said.

The chancellor told the BBC he was extending the deadline for over 65s to apply to May since the idea had proved "enormously popular and successful".

More than £1bn in bonds were sold in the first two days of the scheme and 600,000 people have now signed up.

Labour said Mr Osborne was trying to "erase the memory" of previous cuts.

National Savings and Investments (NS&I) are offering up to £10bn in bonds.

However, Mr Osborne said he expected this figure to be extended to £15bn and the deadline moved until after 15 May, a week after the general election.

Mr Osborne told the Andrew Marr show that the bond - on offer to the over 65s - had been "the most successful saving product this country had ever seen", with 110,000 pensioners signing up in the first two days after they went on sale in January.

"We will guarantee that it remains on sale for a further three months because this government backs savers and supports people who do the right thing," he said.

Analysis by business correspondent Joe Lynam

We knew these pensioner bonds would be popular but few expected them to be this popular.

Their arrival three weeks ago has flushed out billions of pounds of cash owned by older people.

They've found a safe new place to park their money with incredibly generous rates of interest. The original ceiling of £10bn has been scrapped simply because the chancellor and his Lib Dem deputy Danny Alexander didn't want to risk the ire of such a key voting demographic who might have missed out on such a lucrative opportunity.

The fact that the newly-created window for investing in pensioner bonds closes not long after the general election polls do is a happy coincidence.

Critics will say that ordinary working-age taxpayers will be subsidising an often wealthy group of pensioners whose homes have multiplied in value and whose company pensions are far more generous than will be the case when Generation X or Y retires.

Mr Osborne rejected suggestions that it was unfair for those under the age of 65 to be subsidising a scheme that only better-off pensioners could take advantage.

He said pensioners, as well as other savers, had suffered because interest rates had fallen to historic lows of 0.5% over the past five years due "to a deliberate act of government policy".

"Many of these pensioners do not have large sums of money," he said. "They have relatively small savings. They have had these very low interest rates...We have had activist monetary policy to keep interest rates low."

He added: "We need to support savers in our country. That is one of the things that went badly wrong in Britain 10 years ago.

"I think you have to see this in the context of a plan where they have been very low interest rates to support the economy during this difficult period. That has hit savers. I think it is perfectly reasonable for a chancellor to say I want to support savers."

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How the bonds work

The scheme is aimed at those aged 65 or above who have at least £500 to invest and want a guaranteed rate of interest.

The one-year bond pays an annual interest rate of 2.8% before tax, and the three-year bonds pays 4% before tax. Interest will be added on each anniversary after investment.

Investment is limited to £10,000 in each bond, making a maximum of £20,000 per person.

Financial advisers have pointed out that the best one-year bond on the open market is currently paying about 1.85% interest and the best three-year bond is paying 2.5%.

Tax is deducted from the interest paid on these bonds, however non-taxpayers can claim this back from HM Revenue and Customs (HMRC). Basic rate taxpayers must declare the interest if they complete a tax return. Higher and additional rate taxpayers need to declare the interest to HMRC and pay any further tax due.

But the free market think tank, the Institute for Economic Affairs, criticised the extension of the scheme, arguing that it was distorting the market.

"This announcement well and truly proves that we are not all in it together," said the organisation's director general Mark Littlewood.

"Borrowing more expensively than the government needs to is effectively a direct subsidy to wealthy pensioners from the working-age population."

"Pensioner bonds have never been anything other than a gimmick that will benefit pensioners at the expense of the taxpayer, and it beggars belief that the government is prolonging such a foolish policy."

Mr Osborne said the cost of extending the scheme would be in the region of "several hundred million of pounds".

Labour's shadow Treasury minister Chris Leslie said pensioners had suffered under the coalition thanks to the rise in VAT and changes to age-related personal allowances.

"Don't be surprised if George Osborne, as we get closer to an election, tries to give away all sorts of things when, actually, he is trying to erase the memory of how much he has taken away from pensioners."

"And he has not said where he is going to get the money for this. What other public services are going to suffer as a result?"