One of the decisions many employees face as they approach retirement is whether to take their accumulated annual leave and long service leave as a pay-out or to use them and then retire. In this article, we'll explore two reasons why it is generally better to take the leave entitlements and retire, rather than opting for a lump sum pay-out.
Tax Considerations
One key advantage of taking your annual leave and long service leave before retiring is the potential tax benefit it can offer. When you receive a lump sum pay-out for your leave entitlements, it's typically treated as ordinary income for tax purposes in the financial year it's received. This means that a substantial pay-out can push you into a higher tax bracket, resulting in a larger tax liability.
If you are able to spread your payment out over multiple financial years then the amount of tax you are charged could be lower – particularly where you will have little or no other taxable income in the second financial year To maximize this tax advantage, it's advisable to plan the timing of your leave strategically. Consult with a tax advisor or financial planner to ensure that you minimise your tax position while enjoying the benefits of your leave entitlements.
Superannuation Payments
Another factor to consider when deciding between taking leave as a pay-out or retiring with your leave entitlements is superannuation payments. Employers are required to make superannuation contributions on behalf of their employees based on a percentage of their regular earnings. However, when it comes to lump sum pay-outs for annual leave and long service leave, employers may not be obligated to make superannuation contributions.
By choosing to use your leave entitlements before retiring, you can ensure that you continue to receive superannuation contributions during that period. This can significantly boost your retirement savings and help you achieve greater financial security in your post-working years.
It is important to also consider potential social security impacts when assessing whether to take your accrued leave prior to retiring or as a lumpsum. A licenced financial planner can help you choose which option is best for you.
This blog contains general and factual information and does not take into account anyone's individual objectives, financial situation, needs or tax circumstances. We strongly recommend you contact one of our Advisers if you would like personal advice.
Redpoint Investment Holdings Pty Ltd (trading as CY Financial Advice), is a corporate authorised representative (No. 378099) of CY Financial Services (AFSL No. 509648)