Holders of Friends Provident with-profits policies will receive severely reduced bonuses this year, the insurer has announced.

Advisers say the scale of the reductions will prompt holders of the insurer’s 1.2m with-profits policies to question whether they want to keep paying premiums.

Payouts on 25-year policies that mature this year will be around 20 per cent lower than they were in the previous year and both final and annual bonus rates have been cut. Last year, Friends Provident paid a final bonus of £6,293 to holders of 25-year endowments. This year, the final bonus payout will be just £704. Some brokers have predicted final bonuses could soon disappear altogether.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said the with- profits bonus declaration from Friends Provident was one of the worst ever seen. The announcement is expected to herald a series of heavy bonus cuts by UK life assurers this year.

Friends Provident said the reductions in payouts reflected a challenging year in which its underlying fund fell 10.5 per cent in 2008.

Some with-profits endowment policies have underperformed the wider stock market and even cash on deposit, according to a survey by Money Management, the FT magazine.

As a disincentive to those who wish to redeem their funds early, providers have introduced Market Value Reduction charges to policies closed ahead of maturity. Friends Provident has increased by a fraction its MVR charges, which range between 5 and 15 per cent.