The move comes amid concerns about the 30-year old coin's vulnerability to counterfeiting, with an estimated 45 million forgeries in circulation.
The new coin is based on the design of the old threepenny bit, a 12-sided coin in circulation between 1937 and 1971.
A competition will be held to decide what image to put on the "tails" side of the coin.
In his Budget statement to the Commons, Chancellor George Osborne said: "The prerequisite of sound money is a sound currency."
He said the £1 coin was one of the oldest coins in circulation and had become "increasingly vulnerable to forgery".
"One in 30 pound coins is counterfeit, and that costs businesses and the taxpayer millions each year," Mr Osborne continued.
"So I can announce that we will move to a new, highly secure, £1 coin.  It will take three years.
"Our new pound coin will blend the security features of the future with inspiration from our past.
"In honour of our Queen, the coin will take the shape of one of the first coins she appeared on - the threepenny bit.
"A more resilient pound for a more resilient economy."
The government said it would hold a detailed consultation on the impact of the change on businesses, which may face costs from having to change vending machines, supermarket trolleys and lockers at gyms and leisure centres.
Some commentators have raised fears the new piece will not work smoothly in vending machines but the Royal Mint said the coin "will be expressly designed to fit existing mechanisms".
It said the move would increase public confidence in the UK's currency and reduce costs for banks and other businesses.
Earlier, the chancellor tweeted this picture of the £1 coin next to the Budget box, captioned: "Today I will deliver a Budget for a resilient economy - starting with a resilient pound coin."
The current £1 coin was introduced in 1983 as part of the phasing-out of the Bank of England £1 note, which was withdrawn five years later.
Of the 1.5 billion estimated to be in circulation, as many as two million counterfeit ones are removed every year.
The proposed new coin will be roughly the same size as the current one and will be based on the threepenny piece that disappeared after decimalisation in the early 1970s.
The new coin will be made in two colours and will incorporate state-of-the-art technology to ensure it can be "authenticated via high-speed automated detection at all points within the cash cycle", the government added.
While the Queen's head will be on the obverse side of the coin, as it is on all legal tender in the UK, the Treasury has said there will be a public competition to decide the image on the other side.
A Treasury spokesman said the time was right to "retire" the existing £1 coin and using the threepenny bit as inspiration for its replacement was a "fitting tribute" to such an iconic design.
"With advances in technology making high-value coins like the £1 ever more vulnerable to counterfeiters, it's vital that we keep several paces ahead of the criminals to maintain the integrity of our currency," he added.
Adam Lawrence, chief executive of the Royal Mint, which is based in Llantrisant, south Wales, said the process could change the way coins were made in the future.
"It is our aim to identify and produce a pioneering new coin which helps to reduce the opportunities for counterfeiting, helping to boost public confidence in the UK's currency in the process."
The Bank of England, which earlier this year announced banknotes would be made out of plastic rather than cotton from 2016, said the move would "enhance the security and integrity of the currency".

Sum: A new £1 coin, billed by the Royal Mint as the "most secure coin in the world", is to be introduced in 2017.
Q: Paul Pass, 49, died after an attack in Gloucester last Friday.
Two teenagers are charged with his murder and kidnap and other charges relating to the death, at Marian Court flats in the city's Archdeacon Street.
Rezwan Islam, 18, of Derby Road, Gloucester, and a 17-year-old male from Woolwich in south-east London are due to appear before magistrates.
They have also been charged with the kidnap and section 18 wounding of another man, all in connection with the events leading up to Mr Pass's murder.
Bilal Ebrahim Moosjiee, 19, of Podsmead Road in Gloucester, was also charged with two counts of kidnap, while a 17-year-old Gloucester man has been charged with assisting an offender.
Detectives are continuing to question an 18-year-old Gloucester man in connection with the murder, while five other males arrested in connection with the case have been bailed to return to police at a later date.

A: Two people have been charged with the kidnap and murder of a man who was stabbed to death.
Article: The 800-acre (323.7ha) Tanera Mòr is the largest and only inhabited island in the Summer Isles in Wester Ross.
Current owners, the Wilder family, bought the island in 1996 and put it back on the market in 2013.
Breaking up the sale into lots is part of a new effort to sell Tanera Mòr, which has a post office and its own stamps for sending mail from the isle.
The guide price for the whole island has been set at almost £2m.
Lot one, the north end of the isle, involves about 231 acres (93ha) and has been priced at £700,000.
It also includes the Summer Isles Post Office which issues two stamps for mail leaving the island - a Tanera Mòr stamp for it to leave the isle to the mainland and a Royal Mail one for the rest of journey.
Tanera Mòr is the only Scottish island to operate a year-round private postal service.
Lot two involves a central area of about 196 (79ha) acres, including Mol Mòr which is the largest of the isle's beaches, and would cost about £430,000 to buy.
In the 1930s, scientist and writer Frank Fraser Darling transformed large parts of moor on this part of the island into fertile land using manure and shell sand
The south of the Tanera Mòr makes up the final lot and involves about 333 acres (134ha) and has a guide price of £820,000.
John Bound, a partner at selling agents CKD Galbraith, said: "The sale of Tanera Mòr offered now as a whole or in three separate lots adds an exciting dynamic to the sale of this idyllic island as it now allows a number of interested parties the chance to tap into island life.
"Each lot offers comfortable family living with some established and potential business opportunities.
"We believe that by offering Tanera Mòr in lots we will attract potential buyers who are looking to buy into the idyllic island lifestyle."
The island was put up for sale after talks were first held about a possible buyout by the local community living on the mainland nearby.
Among the nearest mainland communities and settlements to the Summer Isles include Coigach, Achiltibuie, Ullapool and Lochinver.
++++++++++
Summarize:
A tiny island off the north west coast of Scotland has been offered for sale as a whole or in three lots.