The Government has issued a consultation paper that would allow savers to self-invest protected rights funds.
Consumers must currently invest protected rights, pension funds built up from National Insurance rebates when contracting-out of the state second pension, in insured funds, bank deposits or mutual funds such as OEICs.
However, providers such as Suffolk Life have got round the issue as they hold a life company within their groups.
The proposed changes would come into force next October and allow people complete freedom to invest directly, such as in shares and commercial property.
Andrew Tully, marketing technical manager at Standard Life, says: "Much of the money currently locked up in protected rights, estimated to be between £75bn and £100bn, will make its way into SIPPs as people want the flexibility and choice to invest their pension pot where they wish.”
Rachel Vahey, head of pensions development at Aegon, says: "This is a big step forward in making pensions clearer for everyone. Allowing the self-investment of protected rights removes an anomaly that did more to confuse people than help them plan for retirement."
The consultation also discusses removing the provision that allows any other person to receive a survivor's annuity if the survivor dies during a five-year guaranteeed period.
Currently the Government requires married couples or couples in a civil partnership to buy a 50% spouse’s pension with their protected rights pot.
Keeping this requirement would mean providers would need to record and identify protected rights and pensions built up from other savings separately.
Standard Life says it would cause more complex communication with scheme members than necessary and, with the need to buy two annuities rather than one, people would receive less income from their savings.
Vahey says: "But in the week after the Government published a Pensions Bill to encourage people to take control of their own retirement destiny with the advent of pensions reform and personal accounts, it seems extraordinary that the DWP isn't prepared to go a little bit further and remove all the differences between protected rights and non-protected rights.
"If it removed the restriction to provide a spouse's pension, this would simplify pensions greatly and mean people could use all their pension pot to buy the right type of annuity to suit their retirement income needs."
The consultation runs until 29 February 2008.
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