PENSION savers were given the green light last week to unlock £350 billion tied up for years in poor-performing pension funds. But they were warned they face huge penalties for switching, long delays and potential mis-selling.

Since Wednesday, more than 10m people who have contracted out of the state second pension, since the option was introduced in 1988, have been able to transfer these “protected rights” into self-invested personal pensions (Sipps). This also applies to hundreds of thousands of people who move out of final-salary schemes.

This money previously had to be held in pension funds run by life insurers, and much of it is in poorly performing with-profits or managed funds. However, many insurers have reintroduced exit penalties known as market value reductions (MVRs) to prevent a run on funds amid the stock-market turmoil.

Aegon, Legal & General, Scottish Widows, Standard Life and Zurich said MVRs would apply to the transfer of protected rights in some cases. Standard Life applies a maximum penalty of 25%, Legal & General levies up to 13%, while Aegon charges up to 7%.

Norwich Union said it was monitoring the situation. It might be forced to apply MVRs if markets continued to fall.

Insurers apply the penalties to discourage a run on the funds.

You might also be giving up valuable guarantees if you transfer out. Tom McPhail at adviser Hargreaves Lansdown said: “If you’re only a couple of years from retirement and have a guaranteed annuity rate of 10% a year attached to your policy, or there’s a heavy MVR for leaving, you probably shouldn’t transfer.”

The Financial Services Authority last week expressed concern some people might be sold unsuitable products.

Sipps give wider investment choice, including the ability to invest in directly-held shares, investment trusts, exchange-traded funds, warrants, fixed-interest securities and commercial property.

Charges can wipe out the benefits, though, particularly for those with smaller pension pots who do not make full use of the added flexibility.

“There are some low-cost Sipps, giving access to top-per-forming managers via a single platform, but if you don’t need lots of extra bells and whistles you might end up paying more for no added benefit,” said Darius McDermott at Chelsea Financial Services.

Those who decide to transfer could face long delays. “It currently takes an average 65 days for us to process pension transfers from insurance companies. In some cases delays are far worse,” said Andy Cowan at adviser Towry Law.

Prudential takes an average of two months, and still pays by cheque. Scottish Widows typically takes 25 business days, while Standard Life transfers money in only five days.

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