Life insurer Norwich Union blamed the tumbling stock market as it cut bonuses and payouts for 3.3 million policyholders.

The group, part of Aviva, said it had been forced to take "prudent action" given the difficult investment climate.

Annual bonuses on with-profits pension products will fall from 4.75 per cent to four per cent and from 3.75 per cent to 3.25 per cent on life and investment plans.

Norwich Union added the average payout on maturing policies would be down by about 12 per cent with a 20 per cent drop on some pensions.

Its move follows rival Britannic's decision last week to scrap annual bonus payments for 2002 for one million policyholders.

Fears are growing that other insurers, such as Prudential, Legal & General and Standard Life, could follow suit.

With-profits policies aim to smooth out stock market volatility by spreading returns out across the life of a product.

Mike Urmston, Norwich Union's chief actuary, conceded the group would be reviewing its bonus rates more regularly in the future.

He said it was not just the FTSE 100 Index's 24 per cent drop last year that had hit the group but "several years of poor investment performance".

He said: "We have not had three bad years in succession like this for over 30 to 40 years. The changes we are making are designed to protect the interests of all policyholders and ensure contined financial stability of the fund."

Aviva was formed when Norwich Union and CGU merged three years ago. The combined group changed its name from CGNU in the summer.

In August, the group said investors were being "discouraged" by stock market uncertainty as it reported flat operating profits of £979 million.