The rally in shares has done little to bolster struggling with-profits funds, many of which have underperformed for years. According to Money Management figures to be published next month, every life insurance company has reduced its payout this year.

But there is a silver lining for with-profits investors: the improvement in the economic outlook is encouraging life companies to remove exit penalties for investors who want to take their money and run.

The average payout on a 20-year with-profits endowment policy receiving monthly savings of £50 was £19,434 for policies that matured on September 1 this year. Last year, the average was £25,682.

Similarly, the average return on 25-year payouts has dropped by 16 per cent in just a year, from £47,538 in September 2008 to £39,931 this year. The worst performing fund, from Life Association of Scotland, has managed just 3.5 per cent growth over 25 years.

“Maturity values have once again drastically fallen,” says Gareth Shaw, author of the Money Management report.

The figures mark a continuing trend of falling payouts on with-profits policies, which have largely failed to live up to expectations. Many were sold in the 1980s and 1990s as a safe investment offering the prospect of consistent investment returns.

They use a technique known as “smoothing” whereby some of the profits in good years are held back to be paid out in bad years. But many with-profits funds overpaid investors in the good years, leaving them with depleted funds now. The funds are often heavily invested in bonds and gilts rather than equities, meaning they are unlikely to do well from stock market growth.

The companies that run the funds also impose penalties, known as “market value reductions” (MVRs) on investors who want to withdraw their funds.

Last year, some of the bigger funds imposed penalties as the market crashed, but most have yet to remove them. Prudential, Axa, Scottish Widows and Standard Life are still applying MVRs.

Earlier this month, Friends Provident removed its penalties altogether, prompting analysts to predict that others could follow. Friends Provident said that because of the market’s improvement in August, it was removing penalties on all pension contracts taken out after 2001 and all life contracts – including with-profits endowments policies. Penalties on other contracts have been reduced to an average of 2 per cent. However, the maximum penalty rate on certain products will still be 10 per cent, down from 13 per cent previously.

“We can expect, if not a complete elimination, certainly a reduction in MVRs,” says Laith Khalaf at Hargreaves Lansdown. This is likely to prompt investors to cut their losses and get out of with-profits policies.

“Once you’re free of the MVR, a massive psychological barrier to transferring out of a with-profits fund is removed,” notes Khalaf.

However, investors should not transfer their fund out blindly. Some with-profits funds, such as those at Prudential, are still decent performers.

Leaving any with-profits policy early also means the investor will not get a terminal bonus, which can often make up a large part of the overall return.

Khalaf suggests that anyone whose policy is about to mature – in two years or less – should stay put to benefit from the terminal bonus.

Others should look at where their policies are invested and how much they are exposed to equities. Investors can check this “equity-backing ratio” to work out how likely their funds are to benefit from stock-market rises – some funds have hardly any equity exposure.

This is more of a concern with “closed” life funds – those that are no longer accepting new business. A report by the Financial Services Compensation Panel in 2007 found that a “closed” with-profits fund typically switches a substantial proportion of its portfolio out of equities and into bonds, to minimise the capital the insurance company needs to support the fund. But not all closed funds underperform. Some pay generous terminal bonuses. Phoenix Assurance and National Employers Life, two closed funds, are currently distributing inherited estates, putting them in the top five funds for payouts this year. Inherited estates are sums that with-profits funds build up if they have kept too much back in previous years.

Investors in Aviva’s with-profits funds also received confirmation this month that the company will be paying them a portion of its inherited estate later this year. Around 800,000 policyholders in the CGNU Life and CULAC funds will benefit from the payouts, with most receiving between £200 and £1,150 – though the payouts will be less than half of what was originally promised in 2008, before the stock market fell.