If you’ve spent years, maybe decades, with the same employer, chances are you’ve built up a significant pot of accrued leave. Annual leave, maybe some long service leave, maybe even some unpaid entitlements.
And as you approach retirement, a big question often comes up:
Should I take my leave as a lump sum or have it paid out as income over time?
Most people instinctively lean toward the lump sum. Bird in the hand, right? But as with most things in financial planning, it’s a little more complicated than that. There are three main factors I’d encourage you to consider before you make the call.
1. Tax
Let’s start with the obvious one.
Taking your leave as a lump sum can push you into a higher tax bracket in your final year of work. Especially if you’ve already got other income landing in the same financial year, like capital gains.
We recently worked with someone who timed their retirement a few months later to fall into the new tax year. That small change saved them thousands in unnecessary tax. So don’t underestimate how important timing can be.
2. Income Transition
Retirement is a big psychological shift. One day you’re receiving a regular income, the next you’re technically unemployed. For some people, that’s thrilling. For others, it’s confronting.
We helped one client negotiate with their employer to receive their leave entitlements at half-pay over 12 months. It meant the employer could spread out a big financial liability, and my client got a smoother, less jarring transition into retired life. Worth thinking about.
3. Social Security
This is the part where I say “please, don’t guess!”.Depending on how your leave payments are treated under different government entitlements, like the Age Pension or the Work Bonus scheme, the decision you make here can directly affect how much support you receive later on.
Social security rules are intricate. And like tax, it’s an area where personalised advice is absolutely worth it.
So What Should You Do?
Here’s a practical checklist to help you work it out:
- Request a leave summary from your employer, including an estimate of what you’d receive if paid out (after withholding tax).
- Use a leave calculator on your government employment information site (for example, Fair Work) to cross-check the estimate.
- Confirm your options in writing. Can you take the leave at full pay? Half pay? Over what period?
- Think carefully about timing. Even delaying your retirement by a few weeks can sometimes make a huge difference.
- Get advice. It doesn’t have to be me, but talk to someone. These decisions sit at the intersection of tax, super, and social security, three areas where the detail really matters.
This post is general information only and doesn’t take your personal situation into account. Before acting on anything here, speak to a licensed financial adviser.
