Pre-paying your funeral is not just a practical way to spare your family a difficult task. Done correctly, it can trigger an immediate boost to your Age Pension, meaning Centrelink effectively covers the entire cost over time. Here is how the rules work and what Australians on a part pension need to know.
Why pre-paying a funeral makes financial sense under Centrelink rules
Under Centrelink's means-testing framework, money directed toward a pre-paid funeral arrangement is removed from assessable assets under both the assets test and the income test. That exclusion can have an immediate and tangible impact on a part-pensioner's fortnightly payments.
The formula works like this: a part-pensioner whose pension is asset-tested gains an extra $3 per fortnight for every $1000 put toward a pre-paid funeral. A $10,000 pre-payment therefore produces a $30 fortnightly increase straight away. Spread over 13 years, the cumulative pension increase fully recovers that original $10,000 outlay.
From 1 July, the maximum amount that can be invested in an approved funeral savings bond scheme rose to $16,250. A single asset-tested part-pensioner who uses the full limit can gain up to $48.75 extra per fortnight. For a couple both taking full advantage, the combined boost reaches $97.50 a fortnight, or roughly $2535 a year. That is the equivalent of earning 7.8 per cent on the invested money, purely from the additional Centrelink payments, before any investment returns inside the fund are counted.
Two ways to pre-pay: Funeral savings bonds versus funeral director plans
There are two main routes Australians can take when pre-paying funeral costs, and each comes with distinct features.
Option 1: Funeral savings bonds
The first option is a dedicated funeral savings bond. Australian Unity and Generation Life are the two major providers currently operating in Australia. Key advantages include flexibility: investors are not locked into a specific funeral director and can choose from different investment mixes within the fund.
These bonds are structured as tax-paid savings vehicles, with the underlying investment earnings taxed at 30 per cent inside the fund. Importantly, no further tax is payable when the money is accessed, regardless of how long the fund has been in place. In some cases, investment growth inside the fund can exceed the actual cost of the funeral, with any surplus flowing to the estate.
Option 2: Pre-paid plans directly with a funeral director
The second option involves arranging and paying for a funeral directly with a funeral director. Many of the larger operators offer their own branded schemes, typically managed by an external fund manager.
A notable feature here is that there is no $16,250 cap on the amount that can be handed over, meaning the full payment is exempt from Centrelink's assets and income tests, regardless of the size of the arrangement. When the time comes, the funeral is carried out according to the pre-arranged plan. If costs have risen and the invested funds fall short, the funeral director covers the difference. However, if the fund has performed strongly, the company retains the surplus, which financial advisers note can make these arrangements profitable for funeral businesses.
Why funeral insurance is a very different product
Both pre-payment options can be structured with instalment payments, but this should not be confused with the funeral insurance products heavily advertised on daytime television. These are fundamentally different arrangements.
Funeral insurance only provides cover while premiums continue to be paid. If payments stop, cover typically disappears entirely and nothing is refunded. Analysis has shown that over the life of some of these policies, customers can end up paying six times the actual cost of a funeral in premiums. It is one reason financial planners consistently steer clients away from them.
Pre-paying a funeral, by contrast, is a one-time or instalment-based capital commitment that delivers an immediate Centrelink benefit and locks in a genuine asset for estate planning purposes.
For retirees on a part pension looking to make their savings work harder, a pre-paid funeral arrangement is among the more straightforward strategies available under current rules.
