Norwich Union, Britain's largest insurer, imposed hefty exit penalties on Tuesday on customers holding with-profits policies, citing the collapse of equities, bonds and commercial property over the past 12 months.

The decision to introduce market value reductions (MVRs) of between 13 and 22 per cent means that a policyholder who had a with-profits pension pot of £200,000 and faced an MVR of 20 per cent would lose £40,000 of his money if he were to withdraw the money before his allotted retirement date. The MVRs, which are designed to ensure policyholders remaining in a fund are not disadvantaged by those seeking to leave, would apply to about 1.2 million of Norwich Union's 2.4 million holders of with-profits pensions, bonds and endowments.

John Lister, Norwich Union's chief actuary, said: “Since the beginning of the year we have seen equity markets, commercial property and corporate bonds fall significantly in value. MVRs are a mechanism to ensure that those policyholders leaving or wishing to take money out of the fund do not take more than their fair share of the fund at the expense of those policyholders who remain.”

Friends Provident joined Norwich Union in reimposing exit penalties on with-profits policies that will range from 5 to 14 per cent. Scottish Widows, Standard Life, Legal & General and Scottish Mutual all have MVRs. Standard Life has one of the highest MVRs, at a maximum of 25 per cent, while Equitable Life has one of the lowest, at 5 per cent.

Tom McPhail, of Hargreaves Landsown, the independent financial adviser, said: “The bad news for with-profits investors is that the price of getting out has just gone up. Investment returns in the next few years are almost certain to lag behind unit-linked funds.”

Tumbling stock markets could also compel Norwich Union to scale down its planned £1 billion payout to with-profits policyholders next year, experts said on Tuesday.

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