July is a popular time of year to retire as unused annual and long service leave pay will be received in a new financial year in which taxable income will usually be low. Tax will be deducted from payments at source but will be refunded once tax returns are submitted.
Is it best to take unused leave entitlements as a lump sum or regular pay? Employers pay super payments on annual leave, on long service leave taken as regular pay, but not on long service leave paid as a lump sum. So taking that as regular pay may be best.
However many people about to retire have reached age pension age. If they take their unused long service leave as regular pay they won’t receive any age pension until it runs out. If they take the payout as a lump sum they can qualify for age pension immediately. So it depends on personal circumstances.
Those retiring this July can earn more interest on bank deposits. Term deposits now offer more than four per cent. This is very welcome for emergency reserves and money likely to be needed for other purposes before long.
However at six per cent inflation is higher than the interest. If inflation is four or five per cent for the next year, term deposits will probably lose purchasing power, not keeping up with inflation. Other options are best for long term retirement investments.
Account based pensions are the most popular retirement income option. They provide regular, reliable, tax-free income that can be varied if necessary. Retirees can choose their investments with a cautious, prudent or growth oriented approach.
Residential property can be a sound retirement investment depending on the level of income needed. Often the rental income after costs is low, around 2.5 to 3.5 per cent of the property value. That may not be enough unless the retiree has several properties.
In some cases it may be better to sell property and reinvest, perhaps in superannuation before age 75. Retirees can now do that even if they aren’t working. That rule changed from July last year.
Anyone can now do non-deductible contributions up to age 75. Money from any source including inheritances and sales of properties, shares and businesses can go into super to set up a retirement income.
Some shares can also provide good retirement income. The major banks pay a reliable 4 to 5 per cent annual dividends. Many other companies pay more. Some property funds pay 8 per cent. Coal and gas miners offer 8 to 15 per cent income.
There are also new lifetime pension products that can increase age pension eligibility. They are very attractive to people in some circumstances.