How paying for your funeral now may be a good investment

It's your funeral. A 2023 study from Australian Seniors shows that the cost of funerals increased by 20 per cent between 2019 and 2023 with a basic burial funeral costing $18,652 and up to $5953 for a basic cremation funeral.

The money you spend on your funeral is exempt from pension and aged care means testing, so on top of the savings you get by paying for your funeral in today's dollars there can be benefits for your pension and aged care fees.

From a pension point of view, if you are affected by the asset test then each $1000 you spend on your funeral could increase your pension by $78 a year.

If Mary is getting a part pension of $500 a fortnight and she pays $50,000 for her funeral and plot, her pension would increase by $3900 a year.

If she lives for another 13 years her increased pension payments have paid for her funeral.

In aged care the means testing of your assets is tiered.

If your assets are between $59,500 and $201,231 you will have 17.5 per cent of your assets included in the means test, so for every $1000 spent on your funeral could save you $175 a year in aged care fees.

Jack is a full pensioner with $150,000 of assets, if he pays $25,000 for his funeral his aged care costs will reduce by $4375 a year.

If Jack lives in aged care for six years the savings on his aged care fees have covered the cost of his funeral.

If organising your own funeral has you feeling a little squeamish a funeral bond is a good alternative.

Funeral bonds are offered by friendly societies and life companies and pay the accumulated investment value to your estate in as little as two days.

Typically the investments are chosen by the bond provider and are very conservative, as a result the returns can be less than what you could get from cash and fixed interest.

There are a few funeral bonds that will give you investment menus which include cash, fixed interest, shares and property.

While prepaying your funeral does not have a price limit the amount you can invest in a funeral bond and have it exempt from pension and aged care means tests is $15,500.

If you thinking about paying for your funeral or buying a funeral bond it's important to realise that one may exempt more than the other. If your funeral and final resting place are going to be a large sum of money then a funeral bond is not going to cover it.

On the other hand if you want a very simple affair there may be money left over from a funeral bond (in which case it is distributed by your estate).

If you are a couple be careful about having a joint funeral bond as it will only pay when the last person dies.

Given you are unlikely to both pass away on the same day it may be best to have individual bonds.

The subject Is covered in much detail in my new book Wills, Death & Taxes Made Simple but keep in mind if you do pre-pay your funeral or buy a funeral bond make sure the paperwork is accessible to your executor. It's too late to discover the paperwork when the funeral is over.

Covering the cost of your funeral can be a good financial investment. It can also ease the stress on your family at a very difficult time by avoiding the disputes that arise when people's wishes are not known.

With the added benefits of pension and aged care exemptions, you may find that your final expense doesn't cost you anything at all.

I have no dependents and have made my nephew and couple of friends beneficiaries of my will. Will they be taxed on the money and can it be minimised?

Your house would be an exempt asset and there would be no tax effect on the cash left to the beneficiaries. The taxable component of superannuation left to a non-dependent will be subject to the 17 per cent death tax. You can reduce the taxable component by adopting a withdrawal and contribution strategy but the simplest method is for you, or your attorney, to withdraw all your superannuation tax-free prior to death and either place in your bank account, or else give it to your beneficiaries. Doing it this way you will be present when they receive the money and hopefully share the joy it will bring.

I recently read an answer to a question posed on CGT and its effect on pension income test, and was surprised to read that the answer that there is none. I am 60, still working, and have two investment properties. I glean from your answer to the above question that I could retire, sell the two investment properties, pay no CGT, use the bring-forward rule to put all the proceeds into super, and then recommence full time work with no penalties, is this correct?

It's not quite that simple. The Centrelink rules and the tax rules are quite different. As I wrote recently a CGT event is not regarded as income for the Centrelink income test, but it will certainly be taxable as far as the ATO is concerned.

I'm confused about my mother's aged care means tested fee. It nearly doubled when we put the money from her sale of the family home in the RAD of the aged care facility. She no longer has the asset of her unit, the aged care facility has the money from the sale of the unit. Why does the daily means test fee go up when one does not own anything? We don't understand it and I wasn't given a clear explanation from Centrelink at all.

Aged care guru Rachel Lane, explains that the amount of your mum's home that was counted for the aged care means test is capped at $201,231, effectively exempting the rest. While the Refundable Accommodation Deposit is exempt from the calculation of her pension, it is 100% assessable for her aged care means testing. By selling her home she has lost an exempt asset and paying it into the RAD she has more assessable assets.