Norwich Union, one of Britain's biggest insurers, today became the latest insurer to hit customers with hefty exit penalties on with-profits bonds and pensions as experts predict a bleak outlook for the funds.

The decision to introduce so-called market value reductions (MVRs) of between 13 and 22 per cent was a response to the collapse of equities, bond and property markets over the past twelve months, Norwich Union said. MVRs are designed to discourage mass selling among its 1 million policyholders.

Norwich Union chief actuary John Lister 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”.

Most with-profits funds offer bonus payouts each year based on performance but hold back some of the profit for future years.Insurers apply MVRs after large falls on the property and share markets to discourage a run on the funds.

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.”

The exact size of the penalty will depend on the date the Norwich Union policy was taken out and will not apply if a policyholder dies.

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