Prudential launched a stout defence of with-profits funds as an investment vehicle yesterday when it reported that its own £83 billion with-profits fund delivered a total investment return before tax and charges of 20 per cent last year, and raising payouts on its policies by up to 18 per cent.

It attributed this to superior investment performance and the freedom the with-profits formula gives its fund managers to change the mix of assets to reflect their views on the markets.

Prudential said its 20-year pensions policies were now worth up to 18.3 per cent more than this time last year, while 25-year Prudential mortgage endowments were 16.7 per cent higher and Scottish Amicable policies rose by 16.1 per cent.

The value of the popular Prudence Bond has risen by 13 per cent over the past year, while pension policies have risen by up to 18 per cent.

Annual bonuses for pensions stay unchanged at 3.25 per cent and one per cent of the sum assured and two per cent of previous bonuses for endowment policies.

Prudential said that when setting annual bonuses it had to take a view on future investment returns. It had held back some of last year's gains to fund final bonuses and maintain a flexible investment strategy.

"We strongly believe that all with-profits funds are not the same," declared Roger Ramsden, executive director, Prudential UK and Europe. "It is important that investors are not led into bad investment decisions by sweeping generalisations about the with-profits sector as a whole.

"This excellent performance should make those who have doubted with-profits as an investment method think again."

Prudential plans to change annual bonus rates only gradually and expects the with-profits fund to earn around eight per cent a year long-term.

A saver who paid £200 a month into a Prudential with-profits pension for 20 years will receive a final pay-out of £127,680 as it matures now, £22,000 more than last year.

A holder of a 25-year Prudential endowment policy costing £50 a month will receive £49,486 for a policy maturing this year, £7,661 more than on one taken out a year earlier and maturing in 2005.

Prudential said all its mortgage endowments maturing this year will meet their repayment targets and produce an average surplus of £3,300, while 96 per cent of Scottish Amicable-branded policies would meet their targets with a surplus averaging £2,600.

But it warned that endowments maturing in future years will not get big enough to repay mortgages.