Royal & Sun Alliance has become the latest insurer to cut bonus rates on some of its savings policies.

The returns... have not been sufficient to sustain bonus rates at the current level Mike Kipling, Chief Actuary

The move is the third reduction over the past year to affect people holding with-profits policies.

It will mean a further 5% reduction on average to the maturity of such policies.

The move affects one million savers and means the maturity value of a typical with-profits policy over the past 12 months would have fallen by up to 22%.

Customers of Clerical Medical also suffered as the assurer chose to follow Royal & Sun Alliance lead and cut pay-outs.

Most assurers facing falling stock markets, including Standard Life, Norwich Union, Prudential and Scottish Widows, have cut the bonuses on with-profits funds.

With-profits policies attempt to cushion savers from sharp falls in the stock market by "smoothing" returns using a system of annual and terminal bonuses.

Terminal bonuses cut

The changes would mean a typical �50-a-month 25-year endowment policy maturing on 1 February 2003 would have fallen to �62,262 from �73,367 three years ago.

Terminal bonus rates on conventional with-profits policies were reduced at four monthly intervals during 2002.

The latest change, following an announcement on 1 September, will reduce payouts by 5% on average.

The surrender value of a �10,000 with-profits bond taken out five years ago would have been �10,961 on 1 February 2003, compared to �13,865 one year ago.

The annual bonus rate for unitised policies taken out after 1 August 2000 will reduce by 1.5% to 1.% on 1 March 2003, Royal & Sun Alliance said.

For policies issued before 1 August 2000 the annual bonus rate will reduce by 1.5% to 1%.

On unitised pension policies the annual bonus rate for policies taken out after 6 April 2001 will reduce by 1.5% to 2.5%. For policies issued prior to 6 April 2001 the annual bonus rate will reduce by 1.5% to 2%.

'Sustained downturn'

Mike Kipling, chief actuary, said the cuts were necessary because of the stock market.

He said: "Over the last three years, there has been the most sustained downturn in share markets worldwide for over 50 years.

During this time, UK share prices have fallen by 42%, of which 25% was during 2002 alone. As a consequence, the returns on the assets underlying our with profits funds have not been sufficient to sustain bonus rates at current levels."

Royal & Sun Alliance's life operation closed to new business in August 2002.

Clerical cuts

Hard on the heels of the Royal & Sun Alliance announcement, Clerical Medical , part of the HBOS banking group announced that it to was cutting bonuses.

Clerical Medical said regular bonuses on life policies would be reduced to 3% from 4%, while pension bonuses would be cut to 3.5% from 4.5%.

In addition, terminal bonuses have also been reduced, although the group said the amount varied according to the type of policy, how long it had been held and how much was in it.