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By Stuart Sheary, Senior Technical Manager
Retirement and unused leave checklist: Take paid leave or the lump sum?
Employees approaching retirement can have significant annual and long service leave entitlements.
Retiring employees have a couple of options on how to receive their leave benefit. They may choose to take a cash lump sum on termination or take paid leave and terminate employment when their leave runs out.
Modelling the options can maximise your clients’ after-tax pay and social security entitlements.
The check list below summarises the benefits of each option where a client is contemplating retirement (not redundancy).
Concessions apply to leave accrued before 18 August 1993 that is paid as a lump sum at retirement.
Unused annual and long service leave accrued after 17 August 1993 is taxed at marginal rates.
Remaining an employee and taking the leave as a paid break can delay receipt of part of the leave until the new financial year. Splitting income across financial years will allow the employee to utilise an additional tax free threshold and lower tiered tax rates.
This can also help avoid Division 293 tax where income for surcharge purposes may otherwise exceed $250,000.
Termination payments received as a lump sum are not assessed against the income test when calculating Age Pension entitlements.
Paid leave is fully assessable under the income test. Eligible employees may be able to reduce assessable income by taking leave on half pay.
Please note: Age Pensioners are automatically entitled to the ‘work bonus’ which exempts the first $300 of fortnightly employment income, including paid leave, from assessment.
If the benefit is received as a lump sum it will be immediately asset tested by Centrelink.
By taking paid leave, the benefit will not be received immediately but over a period. During this period, leave benefits not yet received and banked are not counted towards the assets test.
Taking a lump sum may reduce entitlements to Centrelink payments affected by the Income Maintenance Period (IMP). Please note the Age Pension and Carer Payment are not affected by the IMP.
Paid leave is fully assessable under the income test.
1 This may be greater if eligible for the low income superannuation contribution.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
DisclaimerThe information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.