Excess annual leave: cash out or use it now?
Written by Glen James
Host of the Retire Right & money money money (formerly my millennial money) podcasts & author of The Quick-Start Guide to Investing.
I recently received a great question from a listener who’s sitting on a mountain of annual leave—around 32 weeks’ worth! It’s a situation some of you might find yourselves in after years in the workforce, so I’m going to dive into the benefits, risks, and some options for using or cashing out your leave as retirement approaches:
To cash out or not?
If you’re thinking about cashing out your annual leave, there are a few things to consider. The first key point is depending on your award, you may not be able to cash it out as you hope. Annual leave can also only be cashed out when a registered agreement (between you and your employer) allows it. Even if you can cash out annual leave there are rules around how you can do it—check out the information the Fair Work Ombudsman offers on this topic to dig into these details more.
Tax implications
If you are able to cash out a large amount of leave in a single year, it’ll get lumped onto your regular income and could push you into a higher tax bracket. This means a big portion of that hard-earned leave could go straight to the taxman, leaving you with less than you might expect. So, unless you really need the cash, this isn’t always the smartest option.
Superannuation implications
Another aspect to consider when deciding to cash out annual leave is its impact on your superannuation. If you cash out leave while still employed, you may receive superannuation contributions on top of the cashed-out leave amount. However, if your leave is paid out due to resignation or termination, no superannuation is typically added to that payment. By cashing out while employed, you could give your super balance an extra boost—an important consideration if you’re nearing retirement and aiming to maximise your nest egg.
Consider a reduced workweek
A four-day workweek might be the perfect way to ease into retirement while enjoying a bit more free time now. You could, for example, approach your employer about using accrued leave to take Fridays or Mondays off. This option gives you a little taste of retirement without fully stepping away from the workforce. Plus, it’s a great way to enjoy more downtime with family and friends, pursue hobbies, or even volunteer, all while keeping some income rolling in.
Take extended time off before retiring
If you’ve got years of leave stacked up and you’re a few years away from retirement, consider using that leave in blocks. For example, you could take off 3-6 months at a time to travel, recharge, or even test out your retirement plans. This approach means you’re not only making the most of your leave but also adjusting to life outside of full-time work, which can help smooth your transition when you’re ready to retire fully. This is a fantastic option for those looking to retire in stages, without losing any of that well-deserved time off. It’s also a great option for those who can’t make their work more flexible by cutting down days.
Depending on your situation, you may also have a mix of long service leave on top of your annual leave—awesome! Long service leave varies from state to state, and your employer may also have guidelines around how it can be used. Just take the time to consider all your options with both annual leave and long service leave. Don’t jump straight to cashing out annual leave without considering the implications and possible scenarios for using it.
The moral to this excess annual leave story is to think it through and make a plan. Know how much annual leave is at your finger tips, whether you’re able to cash it out and how you might choose to use it. The more you know, the more informed you’ll be as you make the choice that’s right for you.
Community question
Community member says: I’m very interested in episode 228, different spouse ages. There was an example of a three-year age difference when the eldest is applying for pension. How early would you have to start figuring out these strategies? Five years prior? Also, it’s means tested for the person applying, but does the youngest spouse's super balance come into it at all or just the person applying?
Glen says: Timing really matters with these strategies. There’s no strict rule, so you don’t have to start five years out, but ideally, it helps to plan a few years ahead—especially if you’ve got assets to shift. Centrelink will look at the older spouse’s assets when they apply, but the younger spouse’s super isn’t counted as long as it’s in accumulation phase (not being accessed) until they turn 67.
So if the younger spouse is earning, say, $100,000, that income can still reduce the older spouse’s pension under the income test. Centrelink considers combined household income, which can impact what, if anything, the older spouse receives. However, if the younger spouse’s super stays untouched, it’s not part of the asset test until they reach age 67.
And just a heads-up—some people try to shift money between spouses’ super to lower assets for Centrelink, which isn’t considered ‘gifting’ by Centrelink, so it’s doable within the non-concessional caps. But don’t over-complicate things. Sometimes, optimising for a slight increase in pension isn’t worth the hassle. Always think of lifestyle first and make sure it aligns with what you really want in retirement.
For anyone interested in diving into episode 228, have a listen on Spotify or Apple Podcasts.
