Golden Decision: Take Your Accrued Leave or Cash It Out?
As retirement draws closer, many Australians find themselves with a growing balance of accrued annual leave. You’ve earned it—but should you take the leave for a well-earned break, or cash it out when you retire?
The answer depends on several factors, including superannuation, tax, and social security impacts. Let’s break it down clearly, accurately, and in a way that helps you make the best choice for your golden years.
What Is Accrued Leave?
Accrued leave is paid annual leave that you’ve earned but haven’t yet used. You can either:
- Take time off before retiring and get paid as usual, or
- Retire and receive the accrued leave as a lump sum payment.
While both options might seem equally appealing, they come with different financial outcomes—some of which may surprise you.
Superannuation: A Golden Opportunity Missed?
When you take accrued leave as holidays, your employer is legally required to pay superannuation guarantee (SG) contributions on that income. This is because it’s classed as ordinary time earnings (OTE) under super law.
However, if you cash out accrued leave on retirement, your employer does not have to pay any super on that lump sum. It’s not considered OTE.
✅ Verified by the ATO: “Payments for unused annual leave on termination of employment are not ordinary time earnings.”
Source: ATO – List of payments that are OTE
So, if you’re looking to boost your super before retiring, taking the leave as paid time off could help grow your retirement nest egg—plus you’ll enjoy the break!
The Work Test: A Golden Rule for Older Workers
If you’re aged 67 to 75 and planning to contribute to super after retiring, you need to meet the “work test” to claim a tax deduction on those contributions.
The test requires that you work 40 hours in any consecutive 30-day period during the same financial year you make the contribution.
Here’s the catch: if you’re on paid leave, that counts as work. By taking your accrued leave into the next financial year, you may be able to satisfy the work test and make a deductible super contribution even after finishing active work duties.
There’s also a work test exemption. If your total super balance is under $300,000, and you met the work test in the previous financial year, you may still contribute for an extra year—even if you’re not working.
✅ ATO Resource: Restrictions on voluntary contributions
This makes timing your leave a strategic move.
Tax: When You Take the Money Matters
Lump sum leave payments are taxed in the year you receive them. These payments are not taxed as part of Employment Termination Payments (ETPs), but separately as “Lump Sum A” income. While concessional tax rates may apply, your total tax bill depends on:
- How much you receive, and
- What other income you earned that year.
By taking leave and retiring in the next financial year, you may reduce your taxable income and potentially fall into a lower tax bracket.
✅ ATO Clarification: Tax on unused leave
So, spreading your final salary, unused leave, and any retirement payouts across two years could ease your tax burden.
Age Pension: Assets, Not Income
Thinking about applying for the Age Pension? Here’s something important:
- Lump sum leave payments don’t count as income, but they do count as assets once received.
- If invested in bank accounts or shares, they may push your assets above Centrelink limits—possibly affecting your pension eligibility.
- Paid leave income, however, is treated as employment income and may not count as an asset after retirement.
✅ Services Australia Guidance: Assessable assets for Age Pension
How you use the lump sum matters too. Spending it on exempt assets (like home renovations) may help you stay under the limit.
Weighing Up Your Options
| Factor | Take the Leave | Take the Lump Sum Payment |
|---|---|---|
| Superannuation | Employer contributes SG | No SG paid |
| Tax | Income spread across years possible | May be taxed at higher marginal rate |
| Age Pension Impact | Treated as income while working | Counts as an asset |
| Work Test Eligibility | Can help meet test if timed well | May miss test if not working |
A Final Word of Gold-Plated Advice
Choosing between a paid holiday or a cash payout isn’t just about lifestyle—it has real financial implications.
Before you make your decision, talk to a qualified adviser. A little planning now could leave you with more in your pocket—and more peace of mind—when your working days are behind you.
Contact DJ Grigg Financial today for tailored retirement planning advice that puts you in control of your future.