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 insurer cut terminal bonus payouts at its £13 billion fund.

The move, blamed on turbulent markets, means some main fund customers will have their final bonuses more than halved. Others will see their top-up payment at 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, and the total payout at maturity fall from £36,425 to £32,885.

Friends will save about £30 million this year as a result of yesterday's decision. About 32,000 policies will mature between now and year-end. Friends, which said it was trying to ensure that all the customers were treated fairly, would not rule out taking further action at its next final bonus setting in January, meaning bonus payments may be cut again if market conditions persist. The move marks the latest setback for Friends, which is battling to rejuvenate itself after the collapse of its planned merger with Resolution last year.

It put the sale of its high-end financial advisory firm, Pantheon, on hold this week because of difficult markets. It is thought to be struggling to offload its 52 per cent stake in F&C Asset Management. 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 £12billion 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 2.1 per cent. A 10 per cent bonus to contributors to the 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. However, 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, we need to reduce bonus rates now to reflect the fall in underlying investment values.”

About 43 per cent of the Friends with-profits fund is invested in equities. The FTSE all-share index was down 13 per cent at the end of the first half. A further 8 per cent of the scheme is invested in commercial property, which has also fallen steeply in value. The remaining 49 per cent is invested in fixed-income securities.

Friends is not changing its annual bonuses.

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