Most people have another ‘asset’ up their sleeve leading up to retirement; their leave entitlements.
In some cases, you may also be able to choose whether to take these entitlements as a lump sum or have this paid as a regular income (i.e. go on leave and then retire at the end of the leave period).
So, which is best?
When determining the best way to have this paid there are a range of factors to consider.
Spreading income over two or more years can deliver possible tax advantages [link to previous post].
In many cases, there could be significant tax advantages in spreading your leave entitlements as an income over two or more years, especially in situations where you will have minimal taxable income in retirement.
Another benefit is that when leave entitlements are paid as regular income (in line with your normal rate of pay) they are considered ‘ordinary times earnings’, meaning you receive superannuation guarantee contributions.
In this scenario, annual leave entitlements also accrue while you’re already on paid leave.
A lump sum payout won’t deliver these benefits, but there are advantages worth exploring to ensure you make the best decision for your circumstances.
Firstly, a lump sum can be immediately used for things like paying down a mortgage earlier to save interest.
It’s also important to remember that some tax savings and entitlements are only available once fully retired.
For example, you may be better off being paid a lump sum if it means you can apply for Centrelink benefits sooner (if you are eligible).
In this scenario you may also be eligible to move from your superannuation to pension phase sooner, paying less tax on the earnings of your retirement savings in the process.
As you can see, there’s no black and white answer as to which option is ‘best’ for everyone, but it’s definitely worth spending the time to work out what is best for you.
Written by Dallas Davison.
Dallas Davison, Michael Hogue and Ali Hogue.