Funeral plans: how they work, how they are regulated and what to check

How do funeral plans work?

A pre-paid funeral plan is a contract in which you pay a provider now, in one payment or in instalments, and the provider arranges for a funeral director to carry out the funeral described in the plan when you die. MoneyHelper's guide to planning and paying for a funeral describes this as paying in advance, at today's prices, for some of your funeral, and under the FCA's rules, once the plan is paid for, the provider cannot ask you or your estate for more money to provide the services set out in the contract.

The word that matters there is "some", since a plan pays for the items it lists and anything outside that list is paid for separately. The firm you buy from is not always the provider either, because plans can be sold through intermediaries such as funeral directors and will writers, and the FCA notes that your paperwork or the seller can tell you which firm the provider is.

How are pre-paid funeral plans regulated?

Pre-paid funeral plans have been regulated by the Financial Conduct Authority since 29 July 2022, and from that date it became a criminal offence for a provider to carry out funeral plan contracts without FCA authorisation. The FCA's announcement on the day regulation began explained that customers of authorised providers gained access to the Financial Services Compensation Scheme (FSCS) if a provider fails and to the Financial Ombudsman Service for complaints, whilst commission payments to intermediaries such as funeral directors were banned, as was cold calling.

The detailed rules sit in the FCA Handbook, and whilst none of them says whether a plan suits your circumstances, the protections below all depend on the provider being authorised.

How do you check a funeral plan provider is authorised?

You check the provider on the FCA's own register, and the FCA's page on checking your funeral plan provider is authorised explains how, which is to search for the provider by name in the FCA Firm Checker with a funeral plan selected as the service and then look under "What this firm can do" for permission to enter into a funeral plan contract with you and to administer and process claims on an existing plan.

This matters because a provider without the right permissions leaves you without access to the Financial Ombudsman Service or the FSCS, which makes it unlikely you would get your money back if the firm failed. If the seller is listed as an appointed representative, the FCA suggests checking with the principal firm shown on the register.

How is your money protected, and where can you complain?

Under the FCA's rules a provider must back each plan either with an insurance policy from an authorised insurer on the life of the person the plan covers or by holding enough of your payments in trust, and either must be sufficient to pay for the agreed funeral. MoneyHelper describes these as a whole-of-life policy or a trust held separately from the provider, and whichever is used, the FCA's rules keep the provider responsible for delivering the funeral, even when a funeral director does the work.

If an authorised provider goes out of business on or after 29 July 2022, including on plans bought before that date, the FSCS page on funeral plans says you may be protected, and that the provider should already have arrangements for a new regulated provider to carry out its plans. Where possible the FSCS offers a like-for-like replacement plan, and if you would rather not take it, or one cannot be arranged, it pays compensation based on what the same plan would cost to buy at that point, up to £85,000 per eligible person, per firm.

Complaints go to the provider first, and if it has not sent a final response within eight weeks, or you are unhappy with its answer, the Financial Ombudsman Service can look free of charge at complaints about events after 29 July 2022, and some earlier ones, such as unclear terms at the point of sale or requests for extra money for services outside the plan. It may not be able to help with a complaint about how a funeral director behaved, depending on whether the funeral director was acting for the plan provider at the time.

What does a funeral plan cover, and what does it leave out?

A plan covers the items its documents list, and the FCA requires providers to set these out in a funeral plan summary of no more than two sides of A4, given to you in good time before you buy (or straight after a telephone sale), with one section on what the plan includes and another on what it does not. That second section has to show things a customer would typically expect at a funeral which the plan will not provide, such as catering or flowers, and should highlight where the cost of something like a burial plot may exceed the allowance the plan gives for it.

Allowances are where gaps often appear. When it made its rules in 2021, the FCA said it understood that most plans provide only a fixed contribution towards third-party costs (often called disbursements, such as crematorium fees), and that if the contribution falls short of local prices the family can be asked to pay the difference. MoneyHelper's list of items typically left out also includes minister or officiant fees, although cover varies from plan to plan, and our guide to how much a funeral costs in the UK sets out current figures to read a plan's allowances against.

Anything a plan leaves out is paid by your estate or by whoever arranges the funeral. A plan also affects state help, because in England and Wales, where the person who died had a pre-paid plan, the Funeral Expenses Payment can only give up to £120 towards items the plan does not cover, as our guide to the Funeral Expenses Payment explains alongside the separate Scottish scheme.

What happens if you pay for a funeral plan in instalments?

Paying in instalments spreads the cost, but MoneyHelper notes that paying upfront is cheaper, because instalments add administration fees and interest. The FCA's rules also shape what happens if you die before the instalments are finished, because a provider can only sell a plan with payments running beyond an opening period of no more than 24 months, which the rules call the moratorium, if the funeral will then be provided, with nothing further to pay, when the person dies after that period, or earlier if the death is accidental.

If the person dies during the moratorium from causes other than an accident, the death is treated as a cancellation and the instalments paid are returned without deduction, unless you and the provider agreed that the balance could be paid off and the funeral provided. Providers can agree a shorter moratorium, so the plan summary should state the one that applies, and the separate document sent to your nominated representative should explain what happens if the person dies before the payments are complete.

For instalment plans taken out on or after 29 July 2022, if you miss two payments in a row the provider has to send you a statement within five business days and give you 10 business days to catch up, with no penalty or fee for the missed payments, and it can only cancel the plan on that basis once that process has run its course.

Can you cancel a funeral plan and get your money back?

You can cancel without charge and without giving a reason during the free cancellation period, which under the FCA's cancellation rules for funeral plans lasts 30 days, or 7 days from being told which funeral director the provider has appointed if that ends later, and for an instalment plan it runs for the whole moratorium if that is longer still. After a cancellation in that period the provider has to return what you paid without undue delay and within 30 days of receiving your notice.

Outside that period a provider can charge a cancellation fee, but the FCA's rules say a fee of this kind must be based on a reasonable reflection of the firm's costs and must not be set with a view to profit. MoneyHelper says most providers charge a few hundred pounds and refund the rest, and the plan summary should set out any cancellation fee prominently, so you can see it before you sign.

What are the alternatives to a funeral plan?

The main alternatives MoneyHelper describes are savings, over-50s life insurance, a death-in-service payment from work and money from your estate, which work quite differently from a plan and from each other.

Savings set aside: money in your own account stays yours and can be used for anything, and banks will often release money from an easy-access cash account to pay a funeral bill before probate. The drawbacks MoneyHelper points to are that you might die before you have saved enough, and that funeral costs have tended to rise faster than savings interest.

Over-50s life insurance: this is life insurance rather than a funeral plan, so it pays cash rather than providing a funeral. MoneyHelper's guide to life insurance for the over-50s explains that acceptance is guaranteed without health questions and that, for a premium which stays the same, a fixed lump sum goes to your beneficiaries when you die, for them to spend however they wish. On the other hand the payout does not rise with prices, full cover starts only after a waiting period and you may pay in more over the years than the policy pays out, whilst MoneyHelper's funeral guide adds that cancelling after the 14-day cooling-off period means losing what you have paid in.

Work benefits or your estate: your employer may pay a death-in-service lump sum to someone you nominate, and a will can say which assets should pay for the funeral, although selling assets takes time, so the person arranging the funeral may need to pay first. A regulated financial adviser can weigh these options against your circumstances if they are not straightforward.

How will your family know you have a funeral plan?

Your family can only use a plan they know about, so it helps to tell them and keep the paperwork where they can find it, because the provider's duty to deliver the funeral starts when it is told of the death. MoneyHelper suggests telling your next of kin about the plan, and our guide to direct cremation makes the same point from the family's side, since it advises them to contact the plan provider before approaching a funeral director.

The FCA's rules help, because if you name a nominated representative the provider has to send that person a short document within five business days of the sale explaining the plan and what to do when you die, unless you have said you do not want them contacted. A plan is not a record of your wishes, though, and details such as the music or where your ashes should go can be written down separately, which our guide to a letter of wishes covers, although funeral wishes are not legally binding in England and Wales.

What to do next if you are considering a funeral plan

1. Look at current funeral costs, so that you know what a plan's allowances would need to cover where you live.

2. Check the provider, rather than just the seller, on the FCA Firm Checker, with funeral plan permissions shown under "What this firm can do".

3. Ask for the funeral plan summary and compare its "included" and "not included" sections with the funeral you have in mind.

4. Ask the questions MoneyHelper suggests, such as whether you can choose the funeral director and what happens if you die away from home.

5. If you are thinking about instalments, find out the length of the moratorium and what would happen to your payments if you died during it.

6. Tell your family about the plan and name a nominated representative, then keep the paperwork with your will, which our guide to where to keep your will covers.

A funeral plan is one of the things your family will need to know about after your death, alongside every bank account, utility, insurance policy and subscription you held, and a clear record of all of them makes that work much lighter. If it does fall to your family, Legacy Trail's free notification service can contact the private-sector companies for them.