Exit Penalties Free Up Pensions

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September 30, 2008

Millions of people who have pensions tied up in life insurance funds will breath a sigh of relief as they will be given control over their investments.

What has been hailed as a “pension revolution”, according to Times Online, will mean that up to £350 million in protected-rights pensions will be allowed to move to self-invested personal pensions, or Sipps. This new move by the government could benefit up to 10 million people by next week. The original aim of protected-rights pensions was to protect investors however, in many cases performances were simply not good enough.

Despite this good news, some insurers are imposing market value reductions, or MVRs, so that when protected-rights money is transferred away from their insurance funds they will be subject to with-profits MVRs.

The Times Online goes on to say, “Standard Life, Legal & General, Zurich, Scottish Widows, Aegon and Scottish Life all confirmed this week that MVRs would apply to the transfer of protected-rights funds in some cases. And with no end to the stock market turbulence in sight, more insurers are expected to follow their lead.”

Analysts are saying that the more people leave these funds, insurance companies will be pressured to reintroduce MVRs more aggressively. Some investors won’t even know they existed and will be shocked to see their funds being hit by the penalties.

Others may be willing to sacrifice the cost of MVRs on their investment money because Sipps offer more flexibility and greater freedom to invest in more lucrative funds. However, charges on Sipps may be higher than existing pensions so keep an eye out for one-off charges for additional services, such as share dealing and investment advice if you choose not to make investments yourself.

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