Long Service Leave at Retirement: Lump Sum or Regular Payments?

If you’ve been in the workforce for a long time, long service leave can feel a bit like a quiet achievement, built up year by year and your change at a final payday.

As retirement approaches, many people face the same question: should you take your long service leave as a lump sum when you finish work, or take it as paid time off before you retire?

On the surface, it sounds like a simple choice — money now versus money over time. In reality, it can affect your tax, your super, and even when Centrelink steps in. And like many retirement decisions, the “best” answer depends on your circumstances, not just the rules. Here are a few takeaways to consider.

Takeaway 1: Tax matters, but timing matters just as much

Tax is usually the first concern people raise, and understandably so. Nobody wants to hand over more than they have to.

If you take your long service leave as a lump sum when you retire or resign, it’s taxed as unused leave paid on termination. For most people, this comes with a cap on the tax rate of 30%, plus Medicare levy. That means the maximum tax rate is around 32%, which can actually be lower than your usual marginal tax rate if you’re still earning good money in your final working year.

That’s the part many people like. It feels neat and contained.

But taking leave as regular pay while you’re still working has its own quiet advantages. Those payments are taxed just like your normal salary, but because they arrive over time, you may be able to spread that income across two financial years. For someone retiring late in the year, this can be surprisingly powerful. If your income drops sharply once you stop work, part of your leave may be taxed at much lower rates, or even fall under the tax-free threshold.

Both options can work well. The key isn’t just how you take the leave, but when.

Takeaway 2: Spreading income over financial years can reduce tax in either scenario

This is one of those areas where good planning can quietly save you thousands.

If you take long service leave as paid time off, the spreading happens naturally. You’re taxed only on what you receive in each financial year. For many retirees, this means higher income in the first year and much lower income in the next. That difference alone can reduce overall tax.

With a lump sum, the entire amount is taxed in the year it’s paid. But timing still matters. If you finish work just before 30 June, the whole payment is added to that year’s income. If you delay your termination until early July, the same lump sum may fall into a year where you have little or no other income.

So even with a lump sum, choosing the right retirement date can make a meaningful difference. This is one of those moments where a small calendar change can have a big tax impact.

Takeaway 3: Superannuation often tips the scales toward taking leave

Superannuation is where the difference between the two options becomes clearer.

If you take your long service leave as a lump sum, your employer generally doesn’t have to pay super on that amount, many do even if they don’t have to so its important to check. Once you retire, the super tap is effectively turned off.

If you take the leave as paid time off, you remain employed, and that means super contributions continue. With Super Guarantee sitting at 12%, this can add a useful boost to your super balance right at the point where every extra dollar counts.

There’s also flexibility here. If you already have a salary sacrifice arrangement in place, it can usually continue while you’re on leave. For some people, this final stretch of contributions can meaningfully improve their retirement income.

Takeaway 4: Centrelink outcomes depend on how cleanly you want to step into retirement

Centrelink adds another layer, particularly for those planning to claim the Age Pension.

A lump sum paid on retirement is generally not counted as income for the Age Pension income test. Once it’s in your bank account, it becomes an asset and may be deemed, but it doesn’t delay your ability to claim the pension.

If you take leave as regular pay, those payments are treated as income. That can reduce or delay Age Pension payments until the leave period ends. The Work Bonus can help, but for some people, it still means waiting longer before the pension starts.

There’s no right or wrong here. Some people value a clean break and earlier pension access. Others are happy to wait a little longer in exchange for better super outcomes.

Takeaway 5: Staying employed a little longer can have hidden benefits

There’s also a practical side to this decision that often flies under the radar.

When you take long service leave as time off, you’re still technically employed. That means you continue to accrue leave during that period. In some cases, this results in extra paid leave that simply wouldn’t exist if you retired straight away.

Staying employed can also help meet super work test requirements in a new financial year, allowing additional deductible contributions. For people aged 67 to 74, this can be particularly valuable.

A lump sum, by contrast, draws a firm line. That can feel satisfying, but it does close the door on these extra benefits.

So, which option makes sense?

Like most retirement decisions, this one isn’t about finding the “best” rule — it’s about finding the best fit.

A lump sum can offer simplicity, certainty, and quicker access to Centrelink. Taking long service leave as paid time off often delivers better super outcomes, more tax flexibility, and a gentler glide into retirement.

The right answer depends on your income, your timing, your health, and what peace of mind looks like for you. And sometimes, the smartest move is simply slowing things down rather than stopping all at once.

A note on changing rules

Tax, superannuation and Centrelink rules change over time. Some examples in this article are based on current legislation and may not apply indefinitely. Always check the latest rules or speak with a professional before making final decisions.

Disclaimer
The information provided in this article is general in nature and has been prepared without considering your personal objectives, financial situation, or needs. It does not constitute financial advice. Before making any decisions, you should assess its appropriateness and seek professional financial advice tailored to your circumstances. Additionally, ensure you review the relevant Product Disclosure Statement (PDS) before deciding on any financial product.