There is a small, unglamorous provision in the social security rules that can be worth more than $1,200 a year to a part pensioner, and around $2,500 a year to a couple. It involves setting money aside for a funeral, and most retirees have never had it explained to them.
It is not a loophole and it is not aggressive planning. The rules exist because Parliament decided that money genuinely set aside to cover a funeral should not reduce someone’s pension. They have been in place for decades, they are published on the Services Australia website, and they are used routinely by people who happen to have been told about them.
The catch is that nobody is obliged to tell you. Funeral directors sell prepaid funerals, friendly societies sell funeral bonds, and neither is in the business of explaining how the two compare or whether either is right for your circumstances. This guide does that.
Three separate exemptions
The rules cover three different things, and they work differently.
| What it is | Exemption | |
|---|---|---|
| Funeral bond | A managed investment held in an independent funeral fund, payable only on death | Exempt up to the funeral bond allowable limit |
| Prepaid funeral | A contract with a funeral director, paid in full, for services in the future | Exempt with no limit |
| Burial plot | Ownership of, or the right to be buried in, a plot, niche, crypt, mausoleum or vault | Exempt with no limit |
All three are exempt from the assets test, and they are not assessed under the income test either. That is what makes them different from money sitting in a term deposit, which counts as an asset and is subject to deeming. Our guide on how deeming works explains the treatment these arrangements avoid.
How the funeral bond exemption works
The limit
As at 1 July 2026, the funeral bond allowable limit is $16,250. The Department of Social Services reviews it each 1 July, so it moves annually and the current figure should always be checked with Services Australia before acting.
The detail almost everyone gets wrong
The limit is applied to the amount you originally invested, not to what the bond is currently worth. A bond funded at $16,250 that has grown to $19,000 through accumulated earnings remains exempt, because the test was passed at the point of investment.
That is a meaningful feature. Over a long retirement, the exempt amount quietly grows, and the growth is exempt too. It also means there is a real advantage to establishing a bond earlier rather than later, since a longer runway means more sheltered growth.
The reverse applies at the other end. If the amount you initially invest exceeds the limit, the exemption is lost entirely and the whole balance, including earnings, is assessed as a financial investment subject to deeming. It is not a partial exemption up to the limit with the excess counted. Getting the initial investment right matters more than almost anything else here.
Two bonds, one limit
Up to two funeral bonds per person can be exempt, provided the total initial investment across both does not exceed the limit. Two bonds do not give you two exemptions.
A jointly owned bond is counted as a single bond owned by you, and the limit does not double because a couple invested together. Each member of a couple can, however, hold their own bond up to the limit, which is why the numbers below differ for singles and couples.
You still have to tell Centrelink
You must report any funeral bond you own, even when you know it is exempt. You do not need to report the interest it earns. Failing to report is a common and entirely avoidable source of trouble.
Prepaid funerals: no limit, but no flexibility
A prepaid funeral is a contract with a funeral director for specified services, paid in full in advance. Where that is the arrangement, the amount is exempt from the assets test with no dollar limit at all.
Two conditions matter. The funeral must be genuinely paid in full under a contract for future services, and the amount must not be refundable. A refundable arrangement is not a prepaid funeral for these purposes; it is your money sitting with a funeral director, and it will be assessed accordingly.
You generally cannot have both
Where a person holds both a prepaid funeral and a funeral bond, only the prepaid funeral is exempt. The bond becomes assessable.
There is one important exception. Where the funeral bond is assigned to the funeral director as part of the prepaid funeral arrangement, and the arrangement is a contract for future services, it is treated as a prepaid funeral rather than a bond, and the unlimited exemption applies. This is a common structure, and it is worth asking about specifically, because the wrong sequence can cost the exemption on money you thought was safe.
The same applies in reverse. If you hold an exempt bond and later prepay a funeral, the bond exemption is lost.
Burial plots
A burial plot is exempt regardless of what it cost, and this covers more than a plot in the ground. Ownership of, or the right to be interred in, a niche, a crypt, a family mausoleum or a burial vault all qualify.
Plots are one of the few genuinely uncomplicated items in this area. If you already own one, make sure Centrelink knows it is a plot rather than an unspecified parcel of real estate.
What the exemption is actually worth
Under the assets test, the pension reduces by $3 per fortnight for every $1,000 of assessable assets above the relevant free area. Moving money from an assessable asset into an exempt one therefore has a direct and calculable effect.
| Amount exempted | Pension increase per fortnight | Per year | |
|---|---|---|---|
| Single person, one bond at the limit | $16,250 | $48.75 | $1,267.50 |
| Couple, one bond each | $32,500 | $97.50 | $2,535.00 |
That is a recurring annual benefit, not a one off. Over a fifteen year retirement, the couple’s figure runs to tens of thousands of dollars, and it comes from money they were going to need for a funeral in any case.
There may also be an income test effect. Money moved out of a deemed financial investment reduces your deemed income, which can matter for anyone assessed under the income test rather than the assets test.
When it does not help
This is where honest advice differs from a sales pitch. The exemption is only worth something if the assets test is actually reducing your pension.
- If you are on the full pension with assets comfortably below the free area, moving $16,250 into a bond changes nothing about your payment. It may still be worth doing for other reasons, but not for this one.
- If your assets are far above the cut off and you receive no pension, exempting $16,250 will not usually bring you back under. It might for someone sitting just above the line, which is worth checking.
- If you are assessed under the income test rather than the assets test, the assets test benefit does not apply, though the reduction in deemed income may.
- If you would struggle without the money, this is not for you. The funds cannot be accessed while you are alive, under any circumstances.
Our guide on how the Age Pension income and assets test works sets out which test applies to you, and it is worth establishing that before deciding anything.
The honest downsides
- The money is gone. A funeral bond pays out only on death. There is no early access, no hardship provision, no partial withdrawal. Prepaid funerals are likewise non-refundable, by design.
- Returns are usually modest. Funeral bonds are conservatively invested. They are not competing with a diversified portfolio and should not be assessed as though they are.
- Prepaid funerals lock in a specific provider. If you move interstate, or the operator changes hands, or your family later wants something different, that flexibility is limited. Ask specifically about portability before signing.
- What is included varies enormously. Two prepaid funerals at the same price can cover quite different things. Cemetery fees, death certificates, newspaper notices and celebrant costs are common exclusions.
- Sequence matters. Setting up a bond and later prepaying a funeral costs you the bond exemption. Doing it in the right order, or assigning the bond to the director, avoids that.
- Sales pressure. These products are sometimes sold at moments of distress, occasionally to people for whom the exemption is worth nothing. There is no urgency here. Nobody should be signing anything the same week they are told about it.
Aged care and the wider picture
These exemptions generally carry across to aged care means testing, which uses the same underlying assessment of assets and income. For someone approaching residential care, where the means tested care fee can run into significant amounts, that carry across can be worth more than the pension effect. Our guides on means tested care fees and what aged care really costs set out how those calculations work.
It is also worth distinguishing this from gifting. Money placed in a funeral bond has not been given away; it is still yours and it will be paid out on your death. That means the gifting rules do not apply to it, which is a common point of confusion. Our guide on gifting rules and the Age Pension covers the arrangements that are caught.
Doing it properly
If it looks worthwhile, the sequence is:
- Establish which test is actually reducing your pension, and by how much. If neither, stop here.
- Decide between a bond and a prepaid funeral, based on flexibility, the amount involved, and whether you want the arrangements themselves settled or just the money.
- Check the current allowable limit with Services Australia, since it moves each 1 July.
- Fund it with the right initial amount. Under the limit is safe, over it loses the exemption entirely.
- Tell Centrelink, even though it is exempt.
- Record what you have done somewhere your executor will find it, along with any plot ownership or contract documents.
That last step is not a formality. Families regularly pay twice for a funeral because nobody knew a bond existed. Our guides on what the executor role involves and estate planning deal with keeping that information findable.
Where Professional Advice Adds Value
This is a small decision with a straightforward answer once two things are known: whether the assets test is actually costing you pension, and how the funds interact with everything else you hold. Neither takes long to establish, and both are worth establishing before a product is chosen.
At Money Path the work is usually quick. Confirming which test applies and quantifying the benefit in dollars per fortnight, so the decision is made on a number rather than a general impression. Comparing a bond against a prepaid funeral for your circumstances, including whether you would prefer the arrangements settled or simply the money set aside. Getting the sequence and the amount right, since both can cost the exemption. And making sure it is documented where the family will find it.
We also frequently advise against it. For a full pensioner well under the assets test free area, locking away $16,250 in an inaccessible investment buys nothing at all from Centrelink, and the money may be more use as an accessible buffer. That is a legitimate outcome of the conversation, and it is one you will not usually hear from a product provider.
Frequently asked questions
How much can I put in a funeral bond before it affects my pension?
As at 1 July 2026, the funeral bond allowable limit is $16,250. The limit is reviewed each 1 July, so confirm the current figure with Services Australia before investing. If the amount you initially invest is within the limit, the bond is exempt from the assets test.
What happens if I invest more than the limit?
The exemption is lost entirely. The whole balance, including earnings, is assessed as a financial investment subject to deeming. It is not a partial exemption up to the limit, which is why getting the initial amount right matters.
Does the exemption stop if my bond grows above the limit?
No. The limit applies to the amount you originally invested, not the current balance. A bond funded within the limit that grows through accumulated earnings stays exempt, which is one reason to establish it earlier rather than later.
Can my partner and I each have a funeral bond?
Yes. Each member of a couple can hold their own bond up to the limit. A jointly owned bond, however, is counted as a single bond and the limit does not double simply because you invested together. Up to two bonds per person can be exempt, provided the total initial investment across them stays within the limit.
Can I have both a funeral bond and a prepaid funeral?
Generally only the prepaid funeral would be exempt, and the bond would become assessable. The exception is where the bond is assigned to the funeral director as part of the prepaid funeral arrangement, in which case it is treated as part of the prepaid funeral and the unlimited exemption applies. Ask about this specifically before setting anything up.
Is a prepaid funeral limited to the same amount as a bond?
No. A prepaid funeral paid in full under a contract for future services is exempt from the assets test with no dollar limit, provided the amount is not refundable. The trade off is that you are committing to a specific provider and a specific set of services.
Are burial plots counted in the assets test?
No. A burial plot is exempt regardless of cost, and this extends to a niche, crypt, mausoleum or burial vault, whether you own it or hold the right to be interred there. Make sure Centrelink has it recorded as a plot rather than as other real estate.
Taking the next step
If you are receiving a part Age Pension and the assets test is what is reducing it, this is worth ten minutes of arithmetic. The benefit is calculable in advance, the rules are published, and the decision is reversible only in the sense that it is better not made at all than made wrongly. It is also, for most people, money they were always going to spend.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs. The funeral bond allowable limit is reviewed each 1 July and the figure quoted was current at the time of writing, so confirm it with Services Australia before acting. Funeral bonds and prepaid funerals cannot be accessed before death and prepaid funeral contracts are generally not refundable. You should consider whether the information is appropriate for you and seek personal advice from a licensed financial adviser, and consider speaking with a Services Australia Financial Information Service officer, before making a decision.
