We believe that prudent management of the fund in these circumstances protects its financial strength and balances the interests of all our policyholders Mike Ross, Scottish Widows

The insurer, owned by Lloyds TSB, said bonuses would fall on with-profits policies, to protect the financial strength of the business.

Annual bonus rates on unitised with-profits pension policies will be cut to 2.5% from 4%.

While unitised endowment policies will be cut to 1.5% from 3%.

With-profits polices are designed to protect investors from market falls by smoothing returns, but poor stock market conditions means many insurers are being forced to cut bonus rates.

Protecting policyholders

Mike Ross, chief executive of Scottish Widows, said: "Paying out too much in bonuses would harm the financial strength of the fund and potentially limit returns that could be earned for policyholders in the future."

"We believe that prudent management of the fund in these circumstances protects its financial strength and balances the interests of all our policyholders," he added.

Widows said policy payouts on with-profits funds continued to show good overall returns over the longer term.

A 25-year endowment policy for £50 a month started by a 29 year old man on 1 January 1978 would have paid out £60,004 on 1 January 2003 - a return of 9.8% a year.