Nick Bruining: The two ways you can pre-pay your funeral

Buried among a suite of changes to apply from July 1 is an increase in the amount of money you can pre-pay towards your funeral.

In a bizarre twist — if done properly and ahead of time — some part-pensioners can effectively get the Federal Government to pay for their final send-off.

Funeral pre-payment has become big business for those in the funeral sector, with a substantial number of funerals either fully or partially paid from the proceeds of a funeral fund.

Under Centrelink means testing rules, the money put towards a pre-paid funeral is removed from Centrelink assessable assets under both the asset and the income test.

A part-pensioner with an asset-tested part pension gains an extra $3 per fortnight for each $1000 spent on a pre-paid funeral. A $10,000 pre-payment would see an immediate $30 a fortnight increase.

Over a 13-year period, the entire $10,000 payment is effectively recovered by the extra pension received.

There are two ways you can pre-pay your funeral.

Option one is to take out a special pre-paid “funeral savings bond”. Australian Unity and Generation Life are the two major providers.

A big advantage of this arrangement is that investors are not tied to a specific funeral director and have a choice on the investment mix within the fund.

In some cases, the investment earnings of the fund might exceed the total cost of the funeral with the surplus forming part of your estate.

Up until July 1, the maximum amount that can be invested in these schemes was $15,500, but that has been increased to $15,750.

A single asset-tested part pensioner making full use of the pre-paid limit would see a boost in pension of up to $47.25 per fortnight by pre-paying their funeral.

A couple taking full advantage of the pre-payment concession will gain an extra $94.50 per fortnight, or $2457 per annum.

That’s the equivalent of “earning” 7.8 per cent on your money, courtesy of extra Centrelink payments and before we factor in whatever the investment returns are in the fund.

Option two is where you take out a pre-paid plan directly with a funeral director. Some of the largest funeral directors have their own badged schemes which are, in turn, often managed by an external fund manager.

In this case and depending on your planned send-off and the cost, there’s no $15,750 limit to the amount you hand over. In other words, the full payment is Centrelink exempt.

Whenever your time comes, the contracted funeral is conducted as per the pre-arranged plan. If there’s a shortfall, the funeral director picks up the tab but conversely, if the invested money does better, the company keeps the extra.

Needless to say, for some funeral companies, this could be a nice little earner.

One final point, while all of the above offer a pay-by-instalment option, this is quite different to the funeral insurance advertisements that swamp afternoon TV.

These insurance schemes will only cover the cost of the funeral while you keep paying the premiums. If you stop, there’s usually no cover at all.

Previous analysis has shown that over time for some customers, they could end up paying six times the cost of the funeral in funeral insurance premium payments.

It’s why financial planners never recommend them.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association