If you are approaching retirement and have a large amount of accrued long service leave and annual leave, there are a few things to consider when deciding to either take your leave before retiring or retire and take the leave as a lumpsum.
Take your leave before retiring or retire and take your leave?
If you are approaching retirement and have a large amount of accrued long service leave and annual leave, there are a few things to consider when deciding to either take your leave before retiring or retire and take the leave as a lumpsum.
Taxation
The tax implications will depend on the time of year you retire. If you retire towards the end of the financial year then taking the leave as a lumpsum may increase the amount of tax payable. If you retire at the start of a financial year the lumpsum will likely be taxed at a lower rate as you are not adding it to other income. If you need to stop working you could consider taking leave until the next financial year then retiring.
Accumulation of long service leave and annual leave
Whilst you are on holidays you should be accumulating more leave entitlements. This is an incentive to take the leave as leave as apposed to a lumpsum at retirement.
Superannuation
Another incentive to take the leave before retirement is your employer will contribute 9.5% of your base income as super guarantee contributions, you will not receive this if the leave is taken as a lumpsum.
Account Based Pension
Retiring may also entitle you to commence an account based pension with your superannuation. The tax on earnings in an account based pension is 0% compared to super’s 15%. Depending on the size of your super and the returns it makes this tax may out weight or negate other benefits of taking the leave before retirement.
Age Pension
This will depend on your age and eligibility for Age Pension under means testing. If you are age pension age but ineligible due to your work income, taking the leave will delay access to Centrelink benefits. Retiring and taking the leave as a lumpsum may enable you to access the age pension immediately.
Employer
You should also consider you employer, if you work in a small business and take an extended holiday and retire upon your return, this may leave your employer in an awkward position. Alternatively the employer may be willing to work with you to improve your financial outcome in the planning of your retirement date. With larger employers it may be common practice to take leave before retirement as they have the human resources to manage ad hoc staff departures.
Strategy considerations
There are other considerations to be made; for example if you work for the Government in SA you cannot access your super until you retire, regardless of your age. You may need access to the super to complete a re-contribution strategy where you withdraw and recontribute into your spouse’s name to start an account based pension. This may be required because of your spouse’s age and limited time to make super contributions for the re-contribution side of the strategy.
DISCLAIMER:
This is intended to be general advice only. Goldsborough Financial Services has not taken into account the objectives, financial circumstances or investment needs of any particular person. For specific advice on your situation please contact your Goldsborough Financial Planner.
