Recent research from insurer SunLife found that the cost of a funeral has increased by 87 per cent to £3,590 over the past 10 years, and costs are expected to continue to rise. And the funeral only accounts for 43 per cent of the costs incurred on death, according to SunLife - the average total cost incurred on death is £8,427.
This is made up of, on average:
■ Cost of a basic funeral - £3,590 (43%). This includes the fees for the funeral director, the cremation or burial, the doctor, and the minister or celebrant.
■ Amount for costs such as a memorial, death and funeral notices, flowers, order notes, limousines, venue and catering for the wake - £1,833 (22%).
■ Amount spent on a professional such as a solicitor to administer the estate - £3,004 (36%).
As a result, Dean Lamble, managing director of SunLife, says investors over 55 could consider funding their funeral via their pension pot.
"Because of the potential tax consequences, I'm not suggesting that anyone should rush to cash in their pensions," he says. "However, anyone thinking of taking a lump sum out may want to consider using some of it to pay for their funeral in advance, to beat funeral inflation."
You can take 25 per cent of your pension pot after the age of 55 tax-free.
But Danny Cox, chartered financial planner at Hargreaves Lansdown, says if you can borrow finance at 0 per cent interest this could be a better option, or you could take it from taxed savings such as your current account. "Money inside your pension grows free of tax and the more is in there, the more the growth," he says.
He thinks it is not a good idea to take money out of your pension if it will incur an income tax charge, and if you need to dip into tax-advantaged wrappers then you should look to draw from your individual savings account (Isa) first, as you can draw down from these without incurring tax.
Philip Milton, chartered financial planner at Philip J Milton & Company, is against taking money out of your pension in advance because he says that if you have enough money in your estate to cover the costs then you don't need to pre-fund your funeral.
Your pension fund money passes to your relatives tax-free if you die before you reach 75, as long as you don't exceed the lifetime allowance. If you die after age 75 your beneficiaries can take:
■ The whole fund as cash in one go, subject to 45 per cent tax; or
■ A regular income through an annuity or drawdown, or periodical lump sums with the payments taxed as their income.
Mr Cox argues that you could earmark part of your pension money for your funeral, while benefiting from the tax advantages of this wrapper.
Pre-paid funeral plans
Funeral plan provider Golden Charter argues that customers buying pre-paid plans are protected against the rising costs of funerals and benefit from the peace of mind of knowing their family will be able to pay for a funeral no matter how far it is into the future.
The average cost of a funeral plan is a £3,400 lump sum, according to research conducted by the company. This is less than the cost of an average funeral. However, if you want a funeral plan to pay for extras such as limousines it may cost quite a bit more than this.
Some pre-paid funeral plans put your money into a trust pooled with other people's money and the trustees decide how much money comes out for your funeral at the time required.
Other plans put your money into a whole-of-life insurance policy which pays out to the funeral director when required. Pre-paid funeral plans are not regulated by the Financial Conduct Authority, so Chris Clarke, business development manager at Perfect Choice Funeral Plans, suggests you ensure before taking out a plan that your money is being held securely.
With insurance-based plans, you should ask how much of the amount held in the plan will go towards your funeral, and how much towards other expenses. For example, some of the money may be used to pay a third party selling the plan.
Other third-party costs such as medical fees or newspaper notices, known as disbursements, may not be covered in full by your plan as they are not within the control of a funeral director.
He also suggests using a company that is a member of the Funeral Planning Authority, as this is effectively the only port of call for complaints. While membership doesn't guarantee there will not be problems, its members have to operate within a set of rules and a code of practice.
Which? has a useful table of the costs of funeral plans from members of this organisation. You can view it via this link: www.which.co.uk/money/insurance/reviews-ns/funeral-plans/the-costs-of-funeral-plans/
You can also find more information on what questions to ask a funeral plan provider on the Money Advice Service website at www.moneyadviceservice.org.uk
