The funeral bond alternative providing tax and income advantages to older Australians

While the estate planning efforts of ordinary Australians can get mired in a web of financial and emotional considerations, funeral bonds do have the potential to at least make one aspect of the end-of-life process as easy as possible to navigate.

By connecting directly with funeral providers in the event of death, funeral bond providers can make sure that funds set aside and invested for funeral purposes are paid directly to funeral operators, with family and loved ones freed of the operational burden.

But the benefits of funeral bonds extend far beyond the primary support mechanism they provide, with the potential for significant benefits around social security and taxation.

For those eligible to receive Centrelink or Department of Veterans’ Affairs support payments, contributions toward a funeral bond of up to $15,500 are exempt from the applicable assets and income test. That could translate to an additional entitlement of up to $1,209 for individuals or $2,418 for couples according to funeral bond provider KeyInvest.

Funeral bonds also come with a unique tax treatment that can potentially provide additional benefits, depending on the circumstances. As they are considered tax-paid (i.e. the applicable tax has already been paid already), earnings are not reported on an individual’s annual tax return and don’t become part of their total assessable income. That means the money remains invested without attracting the kind of tax it might if it was outside that environment.

Like any investment product there are nuances that need to be taken into account, however. Some providers offer capital guaranteed products, which can come as a comfort to those planning their end-of-life journey. If the funeral bond is capital guaranteed it still gets paid out, even in the provider encounters difficulty.

According to KeyInvest, this last aspect of provision is an important element that those interested in funeral bonds need to be aware of.

“Not all options in the market are capital guaranteed, only a few offer it because it requires a significant amount of capital to be held on the balance sheet for times when investments do not go to plan,” KeyInvest chief executive Craig Brooke tells The Inside Adviser. “We’re one of those because we understand how to build capital guaranteed products, so notwithstanding the strength of the investment strategy our balance sheet guarantees the investment.”

Brooke (pictured) says funeral bunds are under-utilised in Australia, considering the inherent benefits they provide and the potential upside to those approaching end-of-life.

“Advisers understand the benefits, especially when you’re dealing with a provider that has a capital guaranteed funeral bond product,” he says. “For those in that retirement phase of their journey the financial advantages can be significant, and then when they move towards the end-of-life phase it takes a lot of the uncertainty away for them and their loved ones.

What’s surprising, Brooke says, is that most funeral bonds are still originated through funeral directors rather than financial advisers. If anything, he adds, this presents a fantastic opportunity.

“Many of the owners of the funeral bonds issued are active investors and are either at pre-retirement or retirement stages of life, which means they’re at the point of accessing superannuation they’ve been accumulating their whole life. Yet often they don’t have a financial adviser, even though they probably need advice at these stages more than ever. How can we bring these two issues together to help investors and advisers solve quite serious needs?”  

Tahn Sharpe

Tahn is former managing editor across The Inside Network's three publications.