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More than 430,000 Australians have suffered a partial or total loss to their Centrelink Aged Pension due to the changes to the Asset Test that took place in January 2017.
You may be now wondering what options you have to legitimately change your circumstances to get back some or all of the loss of your fortnightly Aged Pension.
In our first article we discussed some simple strategies that could increase your income, which is the starting point to ensure that you are really getting what you’re entitled to based on your current circumstances.
We then dove a little deeper into a second strategy which posed the question Could gifting improve your Centrelink Aged Pension? This article explained some simple concepts of Centrelink Gifting, its benefits to you if you wanted to distribute (ie gift) small parts of your estate now plus how this could improve your Centrelink Aged Pension as well.
The next step to consider is how prepaying your day of departure, your funeral, can provide some much needed relief to your family and also improve your Centrelink Aged Pension.
Why You Should Consider Prepaying Your Funeral
According to ASIC’s MoneySmart website, a funeral can cost anywhere from $4,000 to $15,000.
Trying to find the money for this, and organising the funeral, can be very stressful for your family, especially at a time when they are mourning and potentially comforting each other following their loss.
Preparing for this in advance and Prepaying Your Funeral can reduce the stress and emotion for your family plus give you the option to decide exactly how you want to be sent off. Your final hurrah!
Generally, there are three options available to you. Two are based on a one-off capital investment and the third requires regular payments in the form of an insurance.
These are discussed below.
Funeral Insurance
Just like it sounds, funeral insurance is a type of regular insurance that is paid to an insurer each year to provide your beneficiaries with a lump sum payment to pay for your funeral.
The insurance cover can be set as you choose. Usually anything between $4,000 to $15,000.
The premiums (paid either fortnightly, monthly or annually) will vary based on a number of factors including age, gender and sum insured.
For example, a male aged 65 covering a funeral expense of $5,000, could pay over $500 per annum for that level of cover.*
This premium would be payable each year until death. This means if you survived until you were 90, you could have paid over $12,500 in premiums to receive only a $5,000 benefit.
Funeral insurance is an expensive way to fund a funeral and in terms of the impact on your Centrelink Aged Pension, there is little benefit. In our case above, paying $500 per year, on a year by year basis the increase to your Centrelink would be only around $1.50 per year.
Aside from funeral insurance, there are two (2) additional options to fund your funeral and potentially increase your age pension.
PrepaID Funeral Service
Prepaying your funeral provides a number of benefits.
It allows you to plan your final day to ensure it’s exactly how you want it. You then can pay for it in advance either in full, or in some cases by instalments.
Additionally, Centrelink does not consider a prepaid funeral to be an asset to you and they do not set a limit on how much you can prepay for a funeral or pay for a burial plot.
Which means if you want a fairly elaborate send off, and want to invest in it now, then once paid, it will be excluded from your assessable assets by Centrelink, helping to reduce the impact of the Taper Rate and potentially increasing your Centrelink Aged Pension.
Some of the positives of prepaying your funeral
All costs are fixed with no ongoing costs. A funeral director cannot increase costs later, meaning you avoid future price increases
- You can plan the funeral you want and avoid leaving the burden to your family
- The investment you make can reduce your assessable assets and possibly increase your age pension
- There are no limits on what you can prepay
Some of the negatives of Prepaying Your Funeral
- Can be inflexible
- May not receive your money back if you change your mind (Ask Before prepaying!)
- If you are well below the Centrelink Asset Test Taper Rate already, then prepaying may have no impact on your Centrelink pension and your income is likely to drop by the amount of interest or other earnings you would have received on that capital.
Funeral Bonds
Another way to prepay your funeral is to use a funeral bond.
Funeral bonds are similar to insurance bonds or investment bonds. Your money is invested in a specialist investment vehicle, a ‘bond’, where the money can grow in value through investment income and capital growth. The bond is internally taxed at a maximum rate of tax of 30%, which means it won’t affect your personal income situation.
The value of the bond can only be withdrawn upon your death, and can only be used to pay for your funeral.
Like prepaid funerals, Centrelink will not include the value a funeral bond, up to the value of $12,500 (indexed to inflation), in your assessable assets. This can help to reduce the impact of the Taper Rate and potentially increasing your Centrelink Aged Pension.
You may have up to two (2) bonds but the combined value cannot exceed $12,500 for each member of a couple. Beware of investing in joint names though, as the 1 bond may count to both your individual limits, effectively halving what will be Centrelink exempt.
A funeral bond will not be exempt if you have also prepaid your funeral.
Some of the positives of funeral bonds
- Funeral bonds are exempt from the Centrelink Assets and income test
- Can put money aside without needing to actually plan your funeral
- Your money in the bond may grow over time
- The investment returns are taxed within the bond
- You can choose your funeral director though you are not locked in if you change your mind later
- Can make regular instalments over time, within limits.
Some of the negatives
- You are not fixing the price of the funeral
- Investment returns are not guaranteed meaning you may receive less than what you invested
- Funeral bonds have ongoing fees
- You cannot withdraw the money if you change your mind later
- You can have joint bond for a couple however, this bond will be assessed against the single limit of $12,500
- If you’re asset value is below the Centrelink Asset Test Taper Rate, the investment into the Funeral Bond may have no impact on your Centrelink pension and your income is likely to drop by the amount of interest or other earnings you would have received on that capital.
Each of the above strategies have their own pros and cons, which means that your personal circumstances will be the key driver behind which one is the most appropriate to you.
Another thing to be mindful of is that the options outlined above have been made available to help remove the potential financial strain on your family during a time of stress and loss.
Similar to gifting, the real aim of Centrelink’s assessment of Prepaying Your Funeral and funeral bonds is to fund your funeral appropriately, so that family, friends and colleagues can mourn your loss without the stress.
If the combination of being able to help prepay your funeral and gain the benefit of an increase to your Centrelink Aged Pension sounds like a positive outcome for you, then it’s a strategy worth considering.
A Word of Caution!
Centrelink’s funeral funding rules and limits can be tricky and falling foul of them could be quite costly, and something you may have to live with for the rest of your life.
Therefore if you would like more information regarding prepaying your funeral and your Centrelink Assessable Assets Contact Us today.
Our Retirement Specialists can provide more detail on the Centrelink Aged Pension changes and discuss any strategies with you which may improve your Aged Pension Benefit.
Just Click here to leave your details and a Retirement Specialist will contact you.
*Source: www.canstar.com.au
This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.
As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.
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