Incredible as it may seem, for some seniors there is a way to get Centrelink to pay for your ultimate, final expense — your funeral.
And while stories of eye-watering send-offs are common, most of us are unlikely to hit the reportedly $300 million spent on Queen Elizabeth’s final farewell.
Mark McKenzie, deputy president of the WA branch of the Australian Funeral Directors Association, said the cost of funerals varied considerably.
“It’s obviously linked to the services provided, and a very basic cremation can cost less than $5000,” Mr McKenzie said.
“Usually, however, allowing about $12,000 is a reasonable amount, and to that you can add things like catering, flowers, religious formalities and other ways of remembering your loved one.”
Pre-paid funerals have become more popular over recent years as the cost of funerals has increased, and seniors don’t want the financial burden borne by their loved ones.
Independent financial planner Jordan Vaka said planners recommended them in specific circumstances.
“A key benefit for a lot of people is how Centrelink assesses the value of a pre-paid funeral because, quite simply, they don’t,” Mr Vaka said.
”A pre-paid funeral can result in an instant increase in your fortnightly age pension, so there’s a direct financial incentive to consider one.”
The strategy only benefits seniors receiving a part-pension because of the application of means-testing. A single pensioner getting $1064 a fortnight or a couple receiving a combined $1604 gain no advantage because they are already receiving the maximum rate of pension payable.
Centrelink will deduct the amount used for a pre-payment from an individual’s assets. Where they receive a means-tested pension, the deduction translates to an immediate increase in the amount of pension payable, up to the maximum rate.
A part-pensioner who is income-tested and pre-pays $10,000 towards their funeral would see the pension increase by a maximum of $4.32 a fortnight, or $112.32 a year.
By far the more impressive effect is for those on an asset-tested pension.
In this case, the $10,000 reduction under the asset test translates to an immediate lift of $30 a fortnight, or $780 over a year. In effect, this is like a 7.8 per cent return on the “investment”, courtesy of Centrelink.
“If you pre-paid $15,000, you could receive up to $1170 a year extra. That means that after 13 years, Centrelink’s effectively paid for your funeral,” Mr Vaka said.
But he warned people should not be confused over the pre-paid arrangements available.
“We are talking about a pre-paid funeral, not funeral insurance. Pre-paid funerals can be funded with a single payment or by instalments until the full amount is paid,” he said.
There are two ways to pre-pay.
The first is to select a funeral director and to work out the full details of the funeral beforehand. Under this scenario, you can dial-up as much of the detail as you wish, even down to the flowers, songs and catering. The full amount pre-paid is Centrelink exempt.
Mr McKenzie suggests explaining this to those likely to be called on to arrange your funeral. Whenever the funeral is held, the contracted service is what’s provided.
“Ideally, you’ll discuss all of this with your loved ones when you make your plan. There’s usually a bit of flexibility at the time we’re called on, but the funeral director will want to respect the spirit of what’s been organised,” he said.
The full amount is paid to the funeral director who, in turn and under State government rules, invests the money in a third-party fund, offering security for the consumer.
Most people opt for the upfront lump sum.
The second option is to establish a dedicated funeral bond fund with one of the recognised providers. You can’t just set up a bank account and say “it’s for the funeral” to obtain a Centrelink exemption. The Centrelink limit for this arrangement is $15,000.
The fund can only be accessed at death, is tax-free and is generally invested in low risk and, therefore, low return investments.
Funeral funds typically show historical returns close to the inflation rate. Over the past 10 years, most have returned less than 2 per cent a year. As such, their real investment value is the potential Centrelink increase, particularly for asset-tested pensioners.
Nick Bruining is an Independent Financial Adviser and a member of the Certified Independent Financial Advisers Association