Abbey National has become the latest group to slash payouts on long-term savings policies, with some bonuses scrapped altogether.

The UK's sixth biggest bank announced that from March annual bonuses on with-profits policies would be between 0% and 4%, and terminal bonuses on unitised policies would be in the range of 0% and 17.5%.

The move will affect about one million customers of Abbey National Life, Scottish Mutual and Scottish Provident who have either a with-profits policy or insurance component of an ISA.

Abbey National blamed the decision on three years of falling stock markets.

Breaking point

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.

With-profits life insurance policies were once seen as a safe way to save for retirement.

The policies involve investing up to 70% of contributions on the stock market, with profits made in good investment years saved to maintain payouts during more difficult times.

However, the stock market has fallen so far in the last three years that the reserves built up in the good years have been stretched to breaking point.

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

On Tuesday Royal & Sun Alliance cut bonus payouts for the third time over the over past year.

No profits

Bonus cuts have become so common in recent times that the government in its draft proposals to reform UK savings published on Wednesday questioned if the term 'With-profits' is misleading and should be dropped.

Abbey national also announced it had reduced its holding in equities to just over 40% of its assets.

Abbey National admitted last November that its profits for 2002 would be hit by a series of charges, including �500m costs arising from its life insurance arm.

The bank is expected to report a substantial restructuring when it reports its profits later this month.