Pension Calculator

Help

The Association of British Insurers (ABI) and Financial Services Authority (FSA) have designed the Pension Calculator to help people estimate the income a defined contribution pension might provide. A ‘defined contribution’ pension includes all personal and stakeholder pensions. It also includes group personal pensions (GPPs), which are employer organised personal pensions you pay into through your work payroll.

Defined benefit pensions, including final salary or career average pension schemes, operate differently. You should contact the scheme administrator if you want to find out what retirement income you might be entitled to from one of these pensions.

The FSA’s moneymadeclear website explains how all the different types of pension work in more detail. If you want to find out more about your State Pension entitlements then you should go to the Government’s Pension Service website. You can apply for a State Pension forecast online.

To estimate your retirement income the calculator needs to know your gross annual earnings (your earnings before tax is deducted). The Government will add an income tax rebate at the basic rate (currently 22%) to your pension. The calculator automatically factors this rebate into its estimate of your retirement income.

Pensions generally give you a lot of flexibility about when you retire. However, there are some constraints worth considering:

• Tax rules mean from 2010 the earliest you can draw a private pension is your 55th Birthday. The latest you can usually draw your private pension is your 75th Birthday. For these reasons the calculator limits your choice of retirement age.
• Currently, the earliest men can claim the State Pension is age 65. Between 2010 and 2020, the age women can claim the State Pension is increasing from 60 to 65. The Government has also produced plans to increase the age that both men and women can claim State Pension to 68 in the future. The Pensions Service have a State Pension age calculator to help you work out when is the earliest you can receive it. You can also defer your State Pension and claim it later if you wish. (www.thepensionservice.gov.uk/resourcecentre/statepensioncalc.asp)

The calculator allows you to set whether you would prefer an income from your pension that is fixed and doesn’t increase with price inflation each year, or one that is ‘index-linked’ and does increase.

One factor to consider is the length of time you will be retired for. You may spend more than 20 years in retirement. Over a 20 year period, prices could rise more than 60% in total, even if they only increase by 2.5% a year. If your income doesn’t increase then it will buy less than half of what it would have done when you retire.

Therefore, you may prefer an income that increases over time. However, buying one that does keep pace with inflation (index linked) is more expensive than a fixed flat income and will require you to save more, or accept a lower starting pension income when you retire.

The calculator allows you to set whether you want your spouse or partner to continue to receive half your pension after your death. A ‘joint life’ retirement income that protects your spouse or partner in this way is more expensive than a ‘single life’ one. Therefore it would require you to save more or accept a comparatively lower retirement income.

One popular advantage of pension saving is that you can take up to a quarter of your pension as a tax-free lump sum at retirement. If you have to pay tax on your retirement income taking this lump sum could be advantageous. The calculator allows you to calculate what you might receive in a lump sum if you took the maximum 25%. Of course, taking a lump sum reduces the regular income you receive, and the calculator will take this into account too.

If you have an existing pension, you can enter the amount that is currently in this pension fund. If it is a current pension that you and/or your employer are paying into then you may enter these exiting arrangements in too. You can enter both your contributions and any employer contributions as either monthly amounts or a percentage of your salary.

Remember this calculator cannot deal with final salary, career average or other defined benefit pensions.

If you are thinking of increasing your pension contributions, or starting new contributions you can enter these new amounts here. You can enter both your contributions and any employer contributions as either monthly amounts or a percentage of your salary.

The calculator will show the income you might receive from these new contributions separately from any income from existing pension contributions, so you can see the effect of your extra payments.

Remember this calculator cannot deal with final salary, career average or other defined benefit pensions.

These figures are estimates and are not guaranteed. The actual pension income you receive will be affected by future changes in things like interest rates, inflation and investment growth. To estimate your future pension we have to make some assumptions about the future based on what we know today.

The assumptions we have used are those specified by the financial services regulator - the FSA - as follows:

• Investment growth: Your pension fund will grow by 7% a year until you retire.
• Inflation: The Retail Prices Index (RPI) will rise by 2.5% a year until you retire.
• Pension fund charges: The company providing your pension will charge 1.5% of your fund for the first 10 years, and 1% thereafter.
• Income tax rebates: The Government will add a tax rebate to your contributions at the basic rate (22%), so that every £1 that goes into your fund consists of 78p from you and 22p from the Government.
• Lifetime annuity rates: When you retire, your pension fund is used to buy a pension income, called a lifetime annuity. We have estimated what lifetime annuity rates might be when you retire.
• Life expectancy: The average age that people are expected to live to.

The Pension Calculator estimates also assume that:

• You keep up regular monthly payments from now until you retire.
• Each year you increase your monthly payments by a minimum of the estimated rate of inflation (2.5%).

Over time, inflation will reduce the buying power of money. Because you will want some idea of what your pension will actually buy when you retire, the pension income estimates in the Calculator take inflation into account at 2.5% a year. For example, in 20 years time, £1,000 will buy only the same as £600 today, assuming inflation of 2.5 per cent a year. So, the Pension Calculator works out what the real buying power of your estimated pension income will be when you retire – expressing it in todays prices.

Back to top