Norwich Union is reducing final bonus rates for with-profits policyholders by up to 10 per cent.

The insurer, which is part of insurance giant Aviva, said its core with-profits fund had achieved a return of minus 7.3 per cent in the first six months of this year, and blamed the losses on “poor investment conditions since the beginning of 2008”. The fund made a gain of 5.4 per cent during the same period in 2007.

As a result, it is cutting final payouts for with-profits customers whose policies mature this year. Payouts on unitised policies will be reduced by around 7.5 per cent, while ones on conventional policies have been cut by an average of 5 per cent, with some savers suffering a 10 per cent reduction.

Norwich Union added that it was not changing regular bonuses paid on the policies or introducing penalties for people who cash in their investment early.

John Lister, chief actuary at Norwich Union, said: “We have reduced final bonus rates because equity markets, commercial property and corporate bonds have fallen significantly in value since the beginning of the year. We are taking responsible action to reflect the market movements over the past nine months.

"We need to ensure that those policyholders who leave the fund do not take more than their fair share at the expense of those customers who remain in the fund.”

The decision could affect customers with a with-profits pension, endowment, savings scheme or bond. With-profits operate a technique known as smoothing, where some of the investment return is retained in good years and added to top up returns during periods of poor performance. The insurance company usually adds an annual bonus at the start of each year and a final bonus at the end of the policy's term.

As a result of the change, which came into force on September 1, someone who paid £50 a month into a mortgage endowment policy for 25 years will receive a final payout of £42,885, compared with £46,829 if a similar policy had matured in January 2007.

Ben Yearsely, investments manager at Hargreaves Lansdown, the independent financial adviser, said: “This is not really a surprise with the way shares, bonds and property have all performed over the past year.

“The point of with-profits is that it should smooth the market volatility – therefore reductions are unlikely to be in the same degree as the fall in the market over the same period. However, with all asset classes falling, a reduction was probably necessary. It wouldn’t surprise me to see more reductions as other with-profits providers declare their bonus levels.”

Norwich Union says that despite the reduction in final bonus rates, payouts are still over and above the value of the underlying asset shares, “demonstrating the value of smoothing returns.”

But Tom McPhail, head of pensions also at Hargreaves Lansdown, said this could cause alarm for investors still in the funds: “Norwich Union is paying out more than it has earned in investment growth, and whilst this is good for people whose policies mature this year, it does not bode well for people remaining in the fund.

“I also notice that the portion of the with-profits fund invested in shares and property has fallen from 71 per cent to 60 per cent in order to minimise risk. Again, this may benefit customers whose policies are maturing soon, but it’s not great for investor’s prospects going forward.”

In July Norwich Union announced that policyholders who invested in the GCNU Life or CULAC with-profits funds will receive a reattribution payout of around £1,000 each, in return for giving up their right to receive any possible future payouts from the funds’ surplus assets, known as inherited estates.