You’re starting to think about retirement and want to ensure that everything you have worked for now serves you in the best way possible.
A part of my job is meeting everyday people who have worked loyally in their careers and are now looking to enjoy what retirement has to offer. For some of us, that means making a decision to use up accrued annual leave and long service leave or to take it as a lump sum.
Let’s think about it, what would your first instinct be when talking about retirement and finishing up? Over the past few appointments with clients in a similar position, they have suggested they would walk into work, let the boss know they are planning to retire and take the lump sum. Quick answer, yes, but is it the best? Possibly not!
The questions that I am asked regularly are based around, ‘when can I finish work?’ and ‘how will this affect my tax position?’. The first question that comes to mind is ‘how much leave/long service leave do you have?’
This is where we find most people start to second-guess their decisions. We simply start with assessing the benefits of cashing out leave vs taking it in incremental payments.
EARN LEAVE WHILST YOU ARE ON LEAVE
One of the first benefits of taking it as leave instead of a lump sum is that whilst you are on leave you continue to accrue leave – even on holidays. That’s right, we have seen clients accrue a whole additional week of leave!
Tax is one of those things that is constant, but have to deal with. We talk to our clients about the capped tax rate that applies when leave is taken as a lump sum such as cashing out their long service leave.
Long Service Leave, taken as a lump sum has the potential to be taxed at the highest marginal tax rate. When taken as leave, paid in your normal pay schedule, you will pay your normal marginal tax rate which includes the benefit of the first $18,600 tax free and then the sliding scale of your marginal tax rate thereafter.
Another advantage of taking leave rather than cashing out as a lump sum is that usually your employer will continue to pay the normal superannuation % on that leave when it is taken as a regular leave payment. This is contrasted to taking the lump sum no super guarantee % is applied to a lump sum of leave paid out. When weighing up the options it depends on the $, which benefits you more.
Our conversations do vary depending on their individual circumstances as well as their employer’s willingness and capacity to support the process of using the annual leave and long service leave leading up to a resignation as a vehicle to retirement.
Seek advice from one of our advisers, specialising in planning for a great retirement. 0249411888, firstname.lastname@example.org