Some Equitable policyholders who have so far been relatively unscathed by the insurer's woes could see their retirement income cut by up to one-fifth next year.

Unfortunately to be fair to all our other policyholders, we must now begin to make these changes

Charles Thomson, chief executive of Equitable Life

In a second blow to the company, Equitable also announced it may not meet the regulator's capital requirements, although the insurer stressed it remained solvent.

Equitable announced on Friday that Charles Thomson, chief executive of Equitable, had written to about 50,000 holders of with-profits annuities informing them that proposed cuts would "significantly reduce" income payments.

In the letter the company warns that on policy anniversaries after 1 February 2003, it will reduce the total value of with-profits annuities by up to 20%.

The letter also outlines further cuts again in 2004, but does not specify by how much.

Tumbling share prices have hit most with-profits funds across the insurance industry and also exacerbated Equitable's woes.

It is a double blow for the with-profits annuity customers, as Inland Revenue rules prevent them from transferring their policies elsewhere.

Other policyholders

Equitable, which has been working hard to repair the firm's finances after its near collapse two years ago from heavy customer liabilities, also issued its interim results on Friday.

The firm has played safe by switching a large number of its equity holding into bonds - about �4bn-worth of shares in total.

But the decision, which was aimed at minimising risks from recent stock market falls, also means that policyholders will get little benefit from any recovery in share prices.

The insurer sought to reassure investors on Friday.

Equitable said that even if it breached capital requirements set by the Financial Services Authority, the City regulator, it would still be able to pay policyholders - and the firm remained solvent.

Charles Thomson said: "For policyholders, it may not make any difference.

"It just means that the spare capital is less, but that doesn't stop us paying the appropriate amount to different groups of policyholders."

With-profits annuities

For Equitable's with-profits annuity customers, though, Friday's announcement could mean a dramatic reduction in income.

Equitable said it had to act, because its with-profits annuities were "now out of line by about 30%".

Until now, with-profits annuities holders have only seen their policy values reduced by 5%, compared to other with-profits policyholders who have suffered an overall reduction of about 20%, the insurer said.

"We have done our best to protect you, as far as possible, from the major setbacks we have recently experienced. However, unfortunately, to be fair to all our other policyholders, we must now begin to make these changes," said Mr Thomson.

Guaranteed pay-out

Equitable said it wished to emphasise to policyholders affected that they would not receive less than the guaranteed payments set out under the terms of their annuity.

This is known as the "basic annuity" and "declared bonus annuity", which may reduce the effect of the reductions, the insurer said.

Equitable said it was "very sorry" about its decision and that it had hoped to introduce reductions in a phased way over the term of the annuity.

Equitable's woes

Equitable's problems came to light when it found it could no longer afford to pay long-standing policyholders the pension they had originally been promised when interest rates were higher.

The policyholders took the company to court when it tried to back out of its previous commitments.

Equitable Life lost the court battle and was left with huge legal bills, as well as being forced to pay the policyholders more than it said it could afford.

As a result, it was forced to close to new business in December 2000 and sold part of its business to the Halifax - now part of HBOS - last year.