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Understanding inherited estates

This article is part of
Guide to With-Profits

An inherited estate is that part of a with-profits fund over and above the asset shares of the current policies and the reserves necessary for guarantees, any non-profits policies in the fund and general contingencies.

Paul Turnbull, actuarial and capital director at Aviva, says the inherited estate is important because it is used to provide:

• security for policyholder guarantees against unexpected adverse conditions;

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• support for smoothing; and

• investment flexibility and the finance needed to support the continued writing of new business in the funds.

In a growing ‘open’ fund, Mike Kipling, with-profits actuary at Friends Life, says there is not likely to be an expectation of any distribution of the estate as the assets will be needed to support the writing of new business and to be preserved for the protection of future generations.

Conversely, Mr Kipling says ‘closed’ funds and shrinking open funds are required by regulation to consider each year whether they have any inherited estate which should be distributed.

This would normally be via increases to bonus rates, although Mr Kipling says a one-off distribution partly in cash is still a possibility, at least in theory.

Phil Brown, head of retirement propositions at LV, says the estate can be used to benefit members in a number of ways, including to help give smoothed returns.

He says the inherited estate at his firm is used to give more freedom to managers to invest in ways he believes will offer better returns and to help fund new business opportunities or risks that the provider believes will be profitable.

Mr Brown says: “Keeping a reasonable level of inherited estate gives us the financial strength we need to invest more in shares, and so to give our members the potential for better returns in the long run.”