Personal allowances will increase in three stages to £9770 for pensioners over 65 and £10,000 for those over 75.
The Chancellor also confirmed pension credits will rise in line with earnings until 2008 as is makes the transition towards restoring the link between the basic state pension and earnings by 2012.
Hargreaves Lansdown head of pensions research Tom McPhail says the personal allowance increases are generous.
“This is good news for all pensioners. The relative appeal of pensions saving will become greater for higher rate tax payers because they will get 40 per cent tax relief on savings whilst working and then in retirement they will enjoy nearly £10k tax free and only pay 20 per cent tax on their income above that up to £43,000.”