Pension savers can unlock an average of nearly £30,000 from poorly performing funds run by life insurers, following a change in the rules last year.

In October, the Department for Work and Pensions lifted the curbs on protected- rights pensions — funds built up by individuals who were “contracted out” of the state second pension. Previously, they had to be invested in insurance funds but they can now be transferred into a self-invested personal pension (Sipp). These generally give you much more investment freedom.

David Dalton-Brown, head of Fidelity FundsNetwork, said: “More modern vehicles like Sipps not only offer greater control, with a wide range of investment options, for example, but they also enable consolidation of holdings, saving time and money, and making asset allocation decisions easier.”

Research from independent financial adviser and Sipp provider Hargreaves Lansdown this week revealed that corporate bond and equity income are the most popular choices for investors transferring their money, many of whom are prepared to stump up hefty charges to leave their existing pension managers.

Among the most popular funds is the Invesco Perpetual High Income fund, managed by Neil Woodford, which has produced a total return over the past five years of 73%. Over the past year, the fund has fallen in value by just over 19%, while the FTSE All-Share index is down 30%.

The Blackrock Gold & General fund is another popular choice for protected-rights transfers. This fund invests in precious metal-related shares rather than gold itself. It has lost 20% over the last year, but has made 60% in the last three months.

Darius McDermott said: “Using volatile funds makes sense if you have some time to go before retirement, however, doing so near to retirement is sailing far too close to the wind.”

According to Hargreaves Lansdown, of the transfers made into its Vantage Sipp, 11% have come from Standard Life, followed by Scottish Widows at 10%, Norwich Union at 9% and Axa and Equitable Life at 6%.

Investors leaving Equitable Life have to fork out a steep 5% market value reduction (MVR) to move their money but those transferring clearly consider this a penalty worth paying for the greater investment flexibility that Sipps provide.

The funds in which you choose to invest your protected-rights pension will depend on your attitude to risk and overall strategy for your retirement fund. Martin Bamford, of adviser Informed Choice, said: “Traditionally, a more cautious approach was always taken when investing protected-rights funds. For investors wishing to continue with a cautious approach, a portfolio weighted to cash and fixed- interest securities would make sense. The M&G Corporate Bond fund and Schroder Strategic Bond fund are both good choices for investors hoping to benefit from the anticipated rising value of the corporate bond asset class.

“An investor wishing to take a moderate level of risk should seek a more balanced approach. Majedie UK Equity has mandates divided between four excellent fund managers.”

Bamford advised that a more adventurous investor with a lengthy term to retirement might consider reducing or removing their exposure to cash and fixed- interest securities entirely.

If you’re considering transferring your pension to a Sipp, first find out whether your existing provider imposes any penalty for moving and check you will not lose benefits such as guaranteed annuity rates.

Remember to factor in management charges, too. Low-cost plans from Hargreaves Lansdown and Sippdeal offer no set-up fees and no additional annual charges, although Hargreaves Lansdown’s Vantage plan charges 0.5% plus Vat for share and investment-trust holdings. This is capped at a maximum of £200 plus Vat a year. Sippdeal charges £50 for investors transferring in from another registered pension scheme.

Investors in both these plans are subject to annual charges on underlying fund holdings in all the Sipps. Both low-cost plans are “execution-only” Sipps sold on the understanding that the consumer has received no advice about them.

Fidelity’s FundsNetwork Sipp is only available through financial advisers and carries administration charges of £104 plus an annual fee of £260.

Investors who are unsure whether they have received any protected-rights contributions should call HM Revenue & Customs’ “contracted out” pension helpline on 0845 915 0150 and quote their National Insurance number.

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