Prudential reduced annual bonuses in its £65billion with-profits fund yesterday, hitting 1.3million policyholders with cuts of up to nearly 10 per cent.

About a million of the Pru's pension policyholders face bonus falls of up to 9.3 per cent.

About 280,000 owners of Prudence Bonds will have bonuses cut by 7.2 per cent, the insurer said. A further 24,000 endowment mortgage customers face shortfalls on policies maturing this year.

The Pru, Britain's second-largest insurer, operates by far the biggest with-profits fund in the country.

Its move, in response to tumbling stock, bond and property markets, comes after Legal & General cut its bonus rates by up to 18.3 per cent last week.

Aviva, which owns Norwich Union, Friends Provident and Standard Life have all cut their with-profits bonus rates in recent months.

The Pru, which last year halted plans to return some of the £5.4billion surplus in the fund to policyholders, has 4.5million with-profits customers.

The insurer said that it was acting in the fund's best interests and was cushioning policyholders against potentially bigger cuts.

A spokesman said that the cuts compared well against rivals and against sharp falls in investment markets. The FTSE 100 share index lost more than a third of its value last year. The Pru is paying out £2.8billion in bonuses.

David Belsham, Prudential's chief actuary, said: “It is important to remember that with-profits products are a medium to long-term investment and our with-profits customers have received strong annualised returns.”

With-profits funds operate a process known as “smoothing”, whereby payouts are capped in the good investment years and limited in the bad to ensure that the fund maintains its overall strength.

A typical Prudential mortgage endowment policy of 25 years with a £50-a-month premium is worth £37,738, down 6.1per cent from a year ago. A 20-year pension pot accruing at £200 a month will pay 9.3percent less than a year ago.

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