Two million with profits investors with Prudential today learned that they will have their final bonuses cut by up to 10 per cent.

The cuts mean that someone who put £200 a month for 20 years into a Prudential personal pension maturing this year will receive a payout of £103,000 compared with a payout of £117,000 on an identical policy maturing last year.

Someone with a £50 a month, 25-year Scottish Amicable endowment maturing this year would receive £42,000 compared with £46,000 last year.

However those with policies that are not maturing this year will suffer less immediate pain. Prudential says it is not changing its annual bonus rates and overall the value of some policies will have risen by up to 3 per cent year on year, while others will have fallen by up to 2 per cent.

Prudential says this represents a good performance when compared with a fall of more than 20 per cent in the stock market in the year to end-September and says this demonstrates the ‘smoothing’ effect of with profits, whereby some of the profits made in good years are held back to boost returns in bad years. It also reflected the strength of Prudential’s with profits fund, which, at £65 billion, is the largest in the UK.

David Bellsham, chief actuary at Prudential, said: “Today’s change reflects the consistent way in which we have managed the fund to ensure a fair approach to the settling of bonus rates.” He added that Prudential is not making any change to its Market Value Reductions (MVRs) - early surrender penalties, which apply to about 15 per cent of policybolders and which average about 4 per cent.

Andy Cowan, head of private clients at Towry Law, the wealth manager, says: “In the world of with profits, this is a pretty good result, especially when you consider how much stock markets have fallen in the past year.

“However with profits as a product is not working. It claims to ‘smooth out’ returns but, in practice, insurers are not holding back enough surplus in the good years fully to make good the losses in bad years. With profits is also anachronistic because it is almost impossible for ordinary investors to understand how their bonuses are actually arrived at. Today’s investors are more savvy and are not prepared to put money into an investment product that they cannot understand.”

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