As retirement approaches, deciding what to do with your accrued leave is an important step. Whether you choose to take your leave as paid time off or cash it out as a lump sum, understanding the financial and practical implications will help you make the best decision for your circumstances. The following explainer outlines the key points to consider, from tax and superannuation impacts to how lump sums may affect government income support.
Understanding accrued leave and cashing out
Accrued leave includes the paid time off you’ve built up during your employment – annual leave and long service leave are the most common forms. When you cash out your accrued leave, you receive a lump sum payment instead of taking time off work. This option usually requires your employer’s agreement and depends upon workplace policies.
While a lump sum can provide immediate cash, it’s important to be aware of the potential financial effects. These payments may be taxed differently from your usual salary, possibly pushing you into a higher tax bracket for that year. Also, cashing out reduces your leave balance, which might limit your opportunity to rest or slow down gradually as you approach retirement.
How cashing out affects superannuation
One factor often overlooked is how cashing out leave affects your superannuation. Employers generally don’t have to pay super contributions on annual or long service leave paid out as a lump sum when your employment ends.
If you take your leave as paid time off instead, your employer continues paying super contributions on your earnings during that period. For example, if you have $20,000 in long service leave and take it as paid leave, your employer would pay super contributions at 12% (the mandatory rate for 2025/26), adding $2,400 to your super balance. Cashing it out as a lump sum means you likely miss out on this boost.
Since employer contributions form a big part of your retirement savings, it’s worth checking your employer’s policy. Some may pay super on lump sums. While this is uncommon, it may be negotiable.
How lump sums affect Age Pension and other income support
Understanding how lump sum leave payments are assessed is important if you’re receiving or planning to apply for the Age Pension or other income support. The key factor Centrelink considers is whether you are still employed or have ceased employment when the payment is received.
If you are still employed:
Leave payments, whether taken as a lump sum or as regular income, count as income for the Age Pension income test. The amount is assessed over the period the leave was accrued (for example, 10 weeks of leave will be assessed as income over 10 weeks). If you receive a large lump sum while still employed and close to your Age Pension eligibility date, this extra income could push you over the income limits, potentially delaying your pension eligibility until the assessment period passes.
Example: If you receive a lump sum for 10 weeks of accrued leave of $10,000, Centrelink will treat this as $1,000 income per week for 10 weeks when calculating your Age Pension.
If you have ceased employment:
Lump sums paid on cessation of employment (such as accrued annual or long service leave payouts) are generally not counted as income for the Age Pension. Instead, the lump sum when it is in your bank account will be included in the assets test and assessed under deeming rules, which can affect your fortnightly payments.
Reporting requirement:
Always report lump sum payments to Centrelink within 14 days of receipt. Even if you think a payment is exempt, reporting ensures correct assessment and helps avoid overpayments you may need to repay later.
Employment Termination Payments (ETPs) versus accrued leave
It’s important to distinguish accrued leave payouts from Employment Termination Payments (ETPs). ETPs include payments like redundancy pay or unused sick leave and are taxed differently. Accrued annual and long service leave are excluded from ETPs and have separate tax rules. Knowing the difference is important for accurate tax planning as you retire.
Things to consider when deciding how to take your leave
- Taking your long service leave as a lump sum all in one financial year may not result in much difference in tax compared to spreading it over time.
- Employer super contributions are usually not paid on lump sum leave payouts. At 12%, taking leave as paid time off can add a significant amount to your super.
- Leave payments paid on cessation count as income for PPS or DSP recipients at Age Pension age.
- Taking paid leave means you might still accrue some additional leave during that period.
- Once you resign, you lose any accumulated sick leave, which can provide a safety net if you fall ill while on leave.
- Lump sum payments are taxable income and may push you into a higher tax bracket.
- Payments received during paid leave are considered regular income.
Practical steps before deciding how to take leave payments
- Review your employment agreement to understand your rights around cashing out leave.
- Talk to your HR or payroll team about tax and superannuation implications for your workplace.
- Consider booking a Retirement Advice Consultation to help balance your retirement and Age Pension eligibility.
- Familiarise yourself with Centrelink’s reporting rules and how lump sums affect income support payments. Retirement Essentials free online Age Pension Eligibility Calculator can help you check on your own likely scenario.
Conclusion
Choosing to cash in your accrued leave or take time off is a personal decision with important financial and lifestyle consequences. Understanding tax rules, superannuation impacts, and government payment assessments will help you make an informed choice that supports your retirement goals and peace of mind.
What’s on your mind?
Are you thinking about cashing out your leave or taking a break before retiring? What concerns or questions do you have?
How are you planning your transition?
What steps are you considering to balance your finances and wellbeing as you approach retirement?
