Funeral bonds are exempt from the Age Pension assets test up to $15,750 per person (FY2025-26) — but exceeding this threshold voids the entire exemption, not just the excess. Prepaid funerals, a contracted arrangement with a specific funeral director, are fully exempt with no upper limit. Both exemptions also exclude the funds from income-test deeming, which can lift pension for those above the assets test free area.
Pre-funding funeral arrangements is a practical step many retirees take for reasons that have nothing to do with Centrelink — removing the burden from family, locking in costs before inflation erodes purchasing power, and ensuring preferences are documented and paid for. But for pensioners near the Age Pension assets test threshold, both funeral bonds and prepaid funerals also have a meaningful Centrelink dimension. The two products work quite differently, and understanding that difference matters.
A funeral bond is an investment product — issued by friendly societies and life offices — where a lump sum is invested with a single purpose: to fund funeral expenses on death. The bond accumulates returns over time, typically taxed internally by the issuer. It cannot be redeemed during the holder's lifetime. The funds are only released on death, to the estate or to a nominated funeral director. That non-redeemable feature is precisely what gives the bond its Centrelink treatment.
A prepaid funeral is a different transaction entirely. With a prepaid funeral, you are contracting with a specific funeral director for a specific set of services at a price agreed today. The money is paid in advance and held in trust until the funeral is conducted. The cost is locked in — if the price of the service rises over the intervening years, you have already paid. You have not invested money for later release; you have purchased a service that will be delivered in the future.
The assets test treatment of the two products is where the distinction becomes financially significant.
Funeral bonds are exempt from the Age Pension assets test, up to a threshold of $15,750 per person, effective from 1 July 2025 (DSS Social Security Guide section 4.6.2.10, guides.dss.gov.au/social-security-guide/4/6/2/10, Guide version 1.338, 20 March 2026). Each member of a couple can hold a separate bond up to this limit individually — for a couple who both hold bonds at the maximum, the combined exemption is $31,500.
There is a structural trap in the bond exemption that catches some investors. If the amount invested in a funeral bond exceeds the $15,750 threshold, the bond does not lose its exemption on just the excess — it loses the exemption entirely. The DSS Social Security Guide states the rule in plain terms: "If an income support recipient invests MORE than the exempt funeral investment threshold, the funeral investment is NOT an exempt funeral investment. The whole investment is assessable" (DSS Social Security Guide section 4.6.2.10). A bond funded at $16,000 — just $250 above the threshold — is fully assessable, not partially exempt. For pensioners close to the assets test cut-off, this is a material distinction: staying below the threshold preserves the full exemption; exceeding it by any amount forfeits all of it.
Prepaid funerals are treated differently. The assets test exemption for a prepaid funeral has no upper limit — a prepaid funeral of any size is fully exempt, provided it meets the qualification conditions the DSS Social Security Guide sets out verbatim: the investment must be "a contracted payment to a funeral director or funeral company" where "nothing further needs to be done for the funeral services to be provided" and the arrangement is "non-refundable, unless the person moves outside the service area of the funeral director" (DSS Social Security Guide section 4.6.2.10). These conditions mean that a genuine advance payment for an identified set of services with a specific provider qualifies. Amounts held in general trust pending future selection do not.
Because exempt assets are excluded from the financial investment framework, a funeral bond below the threshold and a qualifying prepaid funeral both avoid the income test deeming rules — money invested in either arrangement is not added to the pool of financial assets that generate deemed income under the social security income test.
Income-test treatment: exempt funeral investments are also excluded from deeming. Funds invested within the threshold generate no deemed income for the Age Pension income test (Services Australia, https://www.servicesaustralia.gov.au/funeral-bonds-and-prepaid-funerals).
For a pensioner currently receiving a part Age Pension and sitting above the assets test free area, moving $15,750 out of assessable assets via a funeral bond produces a direct pension uplift. The assets test taper rate is $3 per fortnight for every $1,000 of assessable assets above the threshold — a rate that has applied since 1 January 2017 (DSS Social Security Guide section 4.2.3). At that rate, removing $15,750 from assessable assets lifts the fortnightly pension by $47.25, or approximately $1,229 per year. A couple who each hold a bond at the maximum doubles that effect — approximately $2,457 per year in combined additional pension, provided both partners are within the threshold individually.
For pensioners who are well below the assets test threshold, neither the bond exemption nor the prepaid funeral exemption produces any pension improvement. The Centrelink benefit only arises when assessable assets are above the relevant free area — the exemption removes assets that would otherwise be triggering the taper.
The funeral bond exemption threshold for FY2025-26 is $15,750 (effective 1 July 2025, up from $15,500 in 2024-25), confirmed by DSS Guide 4.6.2.10 (https://guides.dss.gov.au/social-security-guide/4/6/2/10) and Services Australia (https://www.servicesaustralia.gov.au/funeral-bonds-and-prepaid-funerals). The threshold is indexed annually each 1 July.
Two-bond rule: A person can hold up to two bonds but their combined initial investment must not exceed $15,750. Once invested within the threshold, the bond's value can grow above $15,750 over time and remains fully exempt — provided the original contribution was within the limit.
The practical planning question for a couple wishing to pre-fund both funerals is whether to use bonds, prepaid funerals, or a combination. Funeral bonds offer flexibility — the money is not tied to a specific provider, so the family retains discretion over which director ultimately conducts the funeral. Prepaid funerals offer cost certainty and an unlimited exemption, but lock in both provider and services. Many couples use both: a prepaid funeral arrangement with the preferred provider for the core services, and a funeral bond to cover anticipated additional costs — a wake, interstate travel for family, or a contingency amount — up to the individual limit.
Funeral bond and prepaid funeral arrangements sit at the edge of estate planning. The funds in either arrangement are committed and are not part of the general estate available for distribution at death. Family members should know the arrangement exists, what it covers, and whether there is a surplus mechanism. These details are worth including in the broader estate planning conversation — alongside the will, enduring powers of attorney, and any superannuation death benefit nominations.
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Key takeaways
- Funeral bonds are exempt from the Age Pension assets test up to $15,750 per person (FY2025-26, effective 1 July 2025) — each member of a couple can hold their own bond up to this limit, for a combined exemption of $31,500.
- The funeral bond exemption is all-or-nothing: if the invested amount exceeds $15,750 by even a small margin, the entire bond becomes assessable, not just the amount above the threshold — staying strictly within the limit is essential.
- Prepaid funerals — a contracted, non-refundable payment to a specific funeral director for defined services — are fully exempt from the assets test with no upper dollar limit, provided the arrangement meets DSS's qualifying conditions.
- Both exempt funeral bonds and qualifying prepaid funerals are also excluded from Centrelink's income-test deeming, so the money doesn't generate assessed income either.
- For a pensioner above the assets test free area, moving $15,750 into an exempt funeral bond lifts the fortnightly pension by about $47.25 (roughly $1,229/year) at the current $3-per-$1,000 taper rate — but this benefit only applies to pensioners currently above the threshold, not those already receiving the full pension.
Frequently asked questions
What is the funeral bond exemption threshold?
The funeral bond exemption threshold for FY2025-26 is $15,750 per person, effective from 1 July 2025 (up from $15,500 in 2024-25), and it's indexed annually each 1 July. A couple can each hold a bond up to this limit individually, giving a combined exemption of $31,500. A person can hold up to two bonds, but the combined initial investment across both must not exceed the threshold.
What happens if I invest more than $15,750 in a funeral bond?
The entire bond loses its exemption, not just the amount above $15,750. The DSS Social Security Guide is explicit on this: if an income support recipient invests more than the exempt threshold, the whole investment becomes assessable, not just the excess. A bond funded at even $250 over the threshold is fully counted as an assessable asset, so it's important to stay strictly within the limit rather than treating it as a soft cap.
Is a prepaid funeral treated the same as a funeral bond for Centrelink?
No — prepaid funerals are treated more generously. A funeral bond is exempt only up to $15,750 per person, but a prepaid funeral has no upper limit at all — any size prepaid funeral arrangement is fully exempt, provided it's a genuine contracted, non-refundable payment to a specific funeral director for identified services. The trade-off is that a prepaid funeral locks in a specific provider and set of services, while a funeral bond keeps the choice of funeral director flexible.
Does a funeral bond or prepaid funeral affect the Age Pension income test?
No, not if the arrangement qualifies for the assets test exemption. Exempt funeral investments — a funeral bond within the $15,750 threshold, or a qualifying prepaid funeral of any size — are also excluded from Centrelink's income-test deeming rules, so the money invested doesn't generate any deemed income counted against you.