If retirement is just around the corner and you’ve built up a sizeable bank of accrued leave, you may be facing a tough question: Should you take a well-earned break now or cash it out as a lump sum when you retire?
While both options might seem attractive, the decision can have significant implications for your superannuation, tax, and even your Age Pension eligibility. Understanding the pros and cons of each path can help you make a choice that maximises your long-term financial wellbeing.
- Superannuation: Boost Your Nest Egg
When you take leave as paid time off before you retire, your employer must pay superannuation guarantee (SG) contributions on those earnings. At the current SG rate of 11.5% (rising to 12% on 1 July 2025), this can provide a valuable boost to your retirement savings.
However, no SG is payable on lump sum leave payments made at the time of retirement — so choosing the payout option means you’ll miss out on that extra super.
Smart Tip:
Take your leave before retiring if you want to increase your super balance — especially in your final working year when every dollar counts.
- The Work Test & Super Contributions After Retirement
If you’re between 67 and 75 years old, you need to meet the “work test” to claim a tax deduction for personal super contributions:
Work at least 40 hours over a consecutive 30-day period in the financial year you contribute.
If you retire and no longer meet the work test, you could lose the opportunity to claim a tax deduction — unless you qualify for the “work test exemption.” This exemption allows one extra year of contributions for retirees with less than $300,000 in super, provided they met the work test in the previous financial year.
Smart Tip:
Plan ahead. Taking leave in July or August and clocking up 40 hours of work early in the new financial year may help you meet the test (or exemption) and keep your super strategies on track.
- Tax: Timing Matters
Lump sum leave payouts are taxed in the financial year they’re received, which could bump you into a higher tax bracket — especially if you also receive termination payments or a final salary.
Delaying your retirement into the next financial year by taking accrued leave as time off could provide:
- More favourable tax treatment if your post-retirement income is low
- Increased ETP (employment termination payment) caps in the new financial year
- A better chance of staying in a lower marginal tax bracket
Smart Tip:
Consult your adviser to explore whether deferring retirement could reduce your tax burden — particularly if your final year includes significant payments like unused leave or redundancy.
- Centrelink & the Age Pension
If you’re planning to apply for the Age Pension when you retire, it’s essential to understand how your leave payout might affect your eligibility:
- Lump sum leave payments aren’t counted as income under the Centrelink income test, but they do count as assets once invested or banked. This could push your total assets above the asset threshold and reduce or eliminate your pension entitlements.
- Wages paid during leave (if taken before retirement) are not counted as assets or income once you’re officially retired and applying for the pension.
Smart Tip:
If you’re close to the pension threshold, taking leave before retiring may help you qualify for the Age Pension sooner — and for longer.
Conclusion: There’s No One-Size-Fits-All
Choosing whether to take your accrued leave as paid time off or cash it out as a lump sum at retirement depends on your personal goals, finances, and timing.
Take the holiday if:
- You want more super contributions
- You need to meet the work test
- You prefer to spread your income for better tax outcomes
- You’re close to Age Pension eligibility limits
Take the lump sum if:
- You want to finish work earlier
- You qualify for tax concessions on ETPs
- You’re not planning to contribute further to super
- You won’t be impacted by the Age Pension assets test
Planning well in advance — with the help of a qualified tax or financial adviser — can help you take full advantage of tax benefits, boost your retirement savings, and avoid any Centrelink surprises.
Final Smart Tips Before You Decide:
- Check your super balance and contribution limits before finalising retirement.
- Use a super calculator to model different outcomes with leave taken as time off vs lump sum.
- Ask your employer for details about your leave balance and termination payout projections.
- Update your Centrelink and ATO records before any big financial change.
- Consult a tax professional to align your retirement and tax strategies.
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