Pension calculator explained

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A pension provides a steady income when you retire, so it’s best to start saving as early as possible for a comfortable retirement. That means knowing how much you’ll need to save now, and how much you might want and need to live on when you finish work. Using a pension calculator will give you a guideline and help you plan for the future. On this page, you’ll learn what a pension calculator is, how it works and how much you should be saving for retirement.

The rundown
  • A pension calculator helps you estimate your retirement income based on how much you’re saving each year and how many years it is until you retire
  • You’ll need to input details such as your age, gender, retirement age, personal pension contribution and your employer contributions if you’re in a workplace pension scheme
  • Before using a pension calculator, you should check any additional benefits you may have with your pension provider, as these may alter the results

What is a pension calculator?

In the UK, a pension calculator is a tool you can use to estimate your retirement income based on how much you’re saving each year into your pension pot, and how many more years you have left to save before you reach your desired retirement age

A pension calculator can help you understand if you’re on track when it comes to working out how much income you’ll need when you retire. It also helps you calculate how much you’ll need to save into your pension pot to reach your desired retirement income. Pension calculators generally determine how much your pension pot will be worth when you retire. 

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How do I calculate my pension?

A pension calculator will ask for details such as your age, gender and your desired retirement age. You’ll also need to provide information on your income and how much you’re paying into your pension, including your personal contributions and how much your employer contributes to your pension pot if you have a workplace pension scheme.

What do I need to consider when calculating my pension?

There are many online calculators to choose from. Before you start using a pension calculator, you should consider checking with your pension scheme provider if you’ll receive additional benefits that could affect your pension pot when you retire, such as housing benefit and income support. The main reason you may want to consider doing this is that if you’re eligible to receive additional benefits, such as an increase in your pension pot, the calculator may not provide results that take these benefits into account. 

Retirement calculators use assumptions to determine how much you’ll receive when you retire, meaning that the result you’ll get is an estimate and not a guarantee. However, most calculators use the estimation rules that almost every pension scheme uses, meaning they provide a good approximation. It’s important to note that the rules vary per pension scheme. 

Pension calculators work by assuming a percentage at which your investments will grow, such as an annual growth rate of 5% with an inflation rate of 2%. The most common assumptions pension calculators use are that you’ll receive a 25% tax top up on your personal contributions and that you’ll receive the same amount from your state pension if you’ve reached the state pension age. 

How much should I be saving for retirement?

How much you should be saving will depend on your personal retirement goals, but most people want to receive an annual amount equivalent of about two-thirds of their working income. For example, let’s say you have an annual income of £30,000. That means you’ll likely want around £20,000 per year during retirement.

The below table is an estimate of the percentage of your income you might need when you retire:

Annual salary range Percentage of salary required for retirement
0 to £12,199 80%
£12,200 to £22,399 70%
£22,400 to £31,999 67%
£32,000 to £51,299 60%
£51,300 and more 50%

The following charts will give you an idea of how much you may want to save for retirement:

What are my different pension options?

If you know how much you want to retire on and have worked out how much you’ll need to save each month to get there, it’s a good idea to think about your pension options. The most common options you’ll have when you retire are taking out an annuity, income drawdown, a lump-sum pension, or withdrawing your whole pension pot.

  • Pension annuity – an annuity allows you to convert your pension pot into a regular income that can last your lifetime. Most people consider taking a pension annuity because it offers a guaranteed income of fixed regular payments. Depending on the type of annuity you choose, you may not be able to leave any money to your family when you die.
  • Income drawdown – this option allows you to keep your money invested when you reach retirement and withdraw your money or ‘drawdown’ incrementally from your pension pot. However, this option comes with risks, as your money is usually invested in the stock market, and could decrease in value depending on the stocks’ performance. Conversely, a benefit of choosing this option is that it can provide high returns on your investment if stocks do well, which will increase your pension pot’s value.
  • Pension lump sums – this is a flexible option that allows you to take lump sums from your pension pot and leave the rest in your current pension fund. This option is similar to a savings account, in that you can withdraw money while allowing the rest to grow.
  • Take out your whole pension – some pensions offer the freedom to take out your whole pension pot in one go. The first 25% of your pension pot will typically be tax-free, and you’ll pay tax on the rest according to your income tax band. The amount of tax you’ll pay is 20% if you’re a basic-rate taxpayer, 40% if you’re a higher-rate taxpayer and 45% if you’re an additional-rate taxpayer.

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