Millions of people saving in with-profits funds who hoped their schemes would protect them from the credit crunch have been warned that payouts will continue to plummet after Norwich Union slashed bonus rates last week.

The insurer, which has 2.4m with-profits policyholders, said plans maturing this year would pay out up to 11% less than those that matured last year, or a cut of more than £6,000 in the worst case.

It is the latest in a string of cuts to payouts, despite the fact with-profits are designed to “smooth” returns by holding back some proceeds in years of good investment performance to pay out in the bad.

The worst cuts at Norwich Union are pretty much in line with the fall in the FTSE 100 index over the past 12 months, meaning savers have seen no benefit from smoothing. The insurer blamed the fact that equities, commercial property and bond yields have all slumped. The move is in stark contrast to July, when it offered more than 1m with-profits holders an average £1,000 cash payout as it agreed to hand back £1 billion of its £2.1 billion “inherited estate” (surplus with-profits assets).

“We’re taking responsible action to reflect the market movements over the past nine months,” said NU chief actuary John Lister. “We need to ensure that those policyholders who leave the fund do not take more than their fair share at the expense of customers who remain.”

The changes came into effect last Monday and mean that payouts from the insurer’s top-paying mortgage-endowment fund dropped by 5%, or £2,144, overnight.

A 15-year pension policy, with a £200 a month investment, has fallen by the most in the past year — by 10.9%, or £6,377 to £51,872. Ten-year with-profits bond payouts are also down by 10.9%, or £1,842, to £15,077 on a £10,000 investment.

Bonds taken out over five years, though, will pay out more this year, due to them capturing more of the upswing in markets: these investments were taken out in 2003, at the end of a three-year equity bear market and start of a four-year bull run.

Separately, savers with Standard Life will also see mortgage endowment payouts tumble by up to 8.8%, or £3,383, this year, while some customers of Friends Provident are nursing a 13.9%, or £8,110, drop.

Experts predict more pain to come. Andy Cowan at adviser Towry Law said: “Too many people still hold these investments. Their long-term future is bleak.”

Despite the fall in popularity, there are about 30m with-profits policies in force.

Should I stay or should I go?

If your policy is close to maturity, it could be worth holding out for the final bonus, though you are likely to get less than an investor whose policy matured a year ago.

Check whether you can make your policy “paid up” — by stopping premiums without surrendering. Everyone else should consider quitting and channelling the money into another savings scheme.

If you cash in the policy before it matures, you will not receive a terminal bonus and might be hit with a market value reduction. Advisers warn that these penalties are rising and can change weekly.

You could get a better price by selling your policy on the second-hand market. Typically, this pays out 10%-15% more.

Brian Goldstein at the Association of Policy Market Makers said some policies achieve 30% more than surrender value. Call 0845 0119400 or go to apmm.org/valuationapmm.org/valuation for details.

Will I qualify for the NU redistribution?

Policies must have been invested in a qualifying fund on November 21, 2006 — the date the reattribution programme was announced — and still be in force next summer when the payments are to be made.

Are there reasons for staying?

If you have a qualifying with-profits plan, the lump sum you receive at the end of your term can be free of tax on income and growth. Your plan has to be in force and all the premiums paid for at least 10 years, or three-quarters of the term if it is shorter.

A grand exit on our policy

Don Hardy netted nearly £1,000 more by selling his Norwich Union endowment on the second-hand market, instead of cashing it in.

The freelance photographer and his wife Julie, 41, a payroll administrator, traded the 25-year policy — taken out to repay their mortgage — with policy buyer AAP.

‘The policy had lost £1,000 over the past year, and the way it was going I thought it could easily lose another £1,000,’ said Hardy, 56, from Tamworth in Staffordshire.

The couple took out the policy in the mid-1980s to repay their £42,000 mortgage. ‘It was meant to pay it off and give a lump sum over and above that, but was facing a £10,000 shortfall,’ added Hardy, who has since repaid the mortgage by other means.

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