‘Pre-paid funeral bond, funeral insurance or keep money in your super fund?’

Q. Some time ago, I read that there may be benefits in pre-paying my funeral. I can’t remember what they were, so I had a look at a couple of pre-paid funeral bonds [but found] that the returns are pretty poor – about 2 per cent per annum. I think I’d do just as well leaving it in my conservative super fund, which has averaged about 6 per cent per annum. But is there something I’m missing here ?

You may have ignored the considerable Centrelink benefits.

A pre-paid funeral bond should not be confused with the heavily promoted funeral insurance products. In many cases, the financial benefits of funeral insurance are questionable.

Financially, a genuine pre-paid funeral only benefits a retiree on a part Centrelink pension and only those whose pension is reduced because of the application of the assets test. Under the asset test, each thousand dollars over the lower threshold reduces the pension by $3 per fortnight. That means that if you pre-paid $10,000 towards your funeral, your pension would immediately increase by up to $30 per fortnight or $780 per year. In effect, this is a 7.8 per cent return on the money and even if added to the miserable 2 per cent earned by the pre-paid funeral bond, your effective return is the 7.8 per cent plus the 2 per cent, which is 9.8 per cent per annum. This is a much better return than the 6 per cent of your super fund.

There are two ways to pre-pay your funeral: the first is a stand-alone funeral bond fund. This is a fund you can make an investment into, but it cannot be self-run such as designating a bank account as a “my funeral fund”. Up to $13,500 per person will be ignored by Centrelink this way, meaning a potential lift in age-pension of $40.50 per fortnight for a single, and a combined $81 per fortnight for couples. You can pay this as a lump-sum or by instalments until you reach your target amount. Only the actual amounts paid can be reduced off your Centrelink assessable assets.

The second option is to identify a funeral director and to plan and pay for the funeral in full (in advance). In most cases, the funeral director will use a similar funeral bond fund, but there is no upper limit. In other words, if you select a gold-plated casket and an elaborate service with catering by a Michelin-starred restaurant, the total cost might come to $32,700. If you pre-pay that full amount to the funeral director, the total becomes Centrelink exempt.

It’s important to note, however, that if you want to pre-plan your funeral, it’s best to discuss it with your family first. Sometimes, planning the funeral can be an important part of the grieving process for your loved ones.

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