Hundreds of thousands of with-profits policyholders at Friends Provident are facing a big slide in the final value of their nest eggs after the life and pensions company cut terminal bonus payouts at its £13 billion fund.

The move, which Friends Provident blamed on turbulent investment markets, means that some customers of the main fund will have their final bonuses more than halved.

Others will see their top-up payment at the funds maturity almost completely wiped out.

The way the final bonus is calculated varies but, in the case of the main fund, it represents a percentage of the total amount of bonuses that have been paid during the lifetime of the fund.

A male customer aged 29, paying £50 a month into a 25-year life policy in its main series fund, would see the final bonus cut from £6,293 to £2,753, Friends said.

This would mean the total payout at maturity would fall from £36,425 to £32,885. Friends said its average customer paid in close to £50 a month.

The move marks the latest setback for Friends Provident, which is trying to reinvigorate itself by selling wealth management assets and turn itself into a stronger but more niche-driven player.

Earlier this week, Friends Provident put the sale of its high-end financial advisory firm, Pantheon, on hold because of difficult markets. It is thought to be struggling to offload its 52 per cent stake in F&C Asset Management, the fund manager.

Policyholders in the Friends Provident Life and Pensions Ltd (FPLP) scheme are the most affected by the latest decision. The scheme houses more than 1.1 million policies and accounts for £12 billion of the total size of the fund.

The holder of a 15-year unitised personal pension plan in the FPLP main series scheme will have their final bonus cut from 18.7 per cent to just 2.1 per cent.

A 10 per cent bonus to contributors to the fund's 25-year conventional personal pension plan will be scrapped.

Brian Harrison, Friends Provident chief actuary, said that to meet bonus rates set in January, the fund would have to generate a return over its lifetime of about 8 per cent.

But he said that the estimated return over the first half of the year so far is minus 7.25 per cent.

"Accordingly, to ensure that we are fair to all customers — not just those with current maturing policies In the dispute — we need to reduce bonus rates now to reflect the fall in underlying investment values," he said.

About 43 per cent of Friends' with profits fund is invested in equities, which have tumbled heavily this year. The FTSE all share index was down 13 per cent at the end of the first half, Friends said.

A further 8 per cent of the scheme is invested in commercial property, which has also fallen steeply in value since the beginning of the year.

The remainder of the fund, or 49 per cent, is invested in fixed-income securities.

A with-profits fund is designed to absorb fluctuations in investment returns, keeping back a proportion of bonuses in the good years to ensure that bonus payments continue in the bad years.

Friends Provident said the move was designed to be fair to all its customers. If it pays out an unfairly high amount to maturing policyholders, that leaves less capital in the fund for existing customers.

Despite this, Friends Provident acknowledged that customers are unlikely to be pleased.

Friends is not changing its annual bonuses.

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