Postcomm has limited the amount by which Royal Mail can lift prices

The company cleared the way for the increases on Friday by accepting a plan that lays out prices until 2010.

Under the agreement with regulator Postcomm, it cannot increase the price of a first-class stamp to more than 37p before 2010.

It is facing new rivals and is battling to plug a pension deficit.

Greater choice

The UK postal market was opened up to greater competition from 1 January, and the Royal Mail has been calling for greater freedom to increase its prices and limit losses.

The company has been losing money on domestic UK mail but has made up for the shortfall with its profitable business mail service.

However, Postcomm said that customers cannot be expected to take the full burden of price increases and the company needs to find ways of cutting costs and becoming more efficient.

A Royal Mail spokesman said the price rise was part of the normal round of adjustments and came only after lengthy consultations with Postcomm.

"New financial year, new prices," he said.

'Obligations'

Postcomm said it has agreed in part to the increase because of the problems Royal Mail was having with its "enormous" pensions deficit.

Under the new agreement, first-class franking prices have also increased to 31p for mail weighing up to 60g, while a second-class franking price will be set at 22p.

Royal Mail Special Delivery Next Day has increased by 25p to �4.10 for mail up to 100g.

"We believe this framework will enable Royal Mail to invest in the business, meet its obligations to the pension fund and build on these achievements going forwards," Postcomm chairman Nigel Stapleton said in March.

Meanwhile, Post Office Financial Services announced that it is to launch its first ever savings account.

The Instant Saver account offers an interest rate of 3.75%, boosted to 4.75% for the first year.

Savers are allowed to make six penalty-free withdrawals a year. After this quota is used up, savers have to pay to make withdrawals.

The highest paying savings account in the market currently pay close to 5%.