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Payment in lieu of Annual Leave

We have received a number of enquiries from employers seeking clarification in regards to payment in lieu of annual leave.

If an employer decides to pay annual leave at the end of an employee’s contract (e.g. on resignation, rotation or retirement) then that leave is pensionable. Whilst they are on leave they have access to sick leave and are accruing additional leave with the employer etc.


Assumes whole-time and Monday to Friday working pattern

Member A

Leaving employment on 31 August 2020 and has outstanding annual leave. The employer has to calculate the amount of annual leave the member has until that date i.e. 33 days annual leave x 5/12 (April to August). For this example, we’ll assume they have 10 days left, this would mean their last day at work would be 17 August 2020 plus 10 days annual leave takes them to 31 August 2020.

The member must be in attendance at work to have a last day of service of 31 August 2020 and will have to work past 17 August 2020. If they don’t attend work the last day of service will be 17 August 2020.

If however, a member agrees with their employer to give up any untaken annual leave in exchange for a one-off payment, this payment is not pensionable.

For example, a person with 10 days of untaken annual leave may agree with their employer to take a one-off lump sum payment instead of taking their 10 days leave.

In this example, if they leave on 28 February 2020 their pensionable service also ends on that day, not 10 March 2020. The one-off payment to compensate for the untaken leave is non-pensionable.