The Prudential has written to 39,000 customers saying it valued their pensions incorrectly.
It is offering customers "correction payments" of between £100 and £1,000 each, worth £4m in total, to make up for the error.
The mistakes were made in Scottish Amicable unit-linked pension plans between June 2004 and December 2008, the Telegraph reports.
A Prudential spokesperson explains the insurer had assumed its subsidiary Scottish Amicable would deduct tax from the investment income earned by pension funds and recovered against its own tax liability.
During a routine audit, the Pru found this was not the case and amended its prices for the pensions in December 2008.
However, the Pru did not amend the prices of the 39,000 Scottish Amicable pension holders who were already retired or had transferred their pensions, and now must rectify its mistake.
The Pru says its audit committee and the FSA have been informed of the situation, and customers of its other subsidiaries, such as M&G, are not affected.
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