Pension Drawdown Calculator
Guide to the Pension Drawdown Calculator
Guide to the Pension Drawdown Calculator
Who will the pension calculator be useful to?
This drawdown pension calculator is designed to help those who are going to use flexible drawdown as a means to generate income in retirement rather than buying an annuity. It looks at the sustainability of income at different investment rates and the impact of taking a one off withdrawal from your fund. It shows what the likely residual value of your fund will be depending on how long you live.
What does the pension drawdown calculator show?
Enter your current pension fund as the starting value, when you want the pension to start and how much pension income you want. You can vary the income over three different periods of your retirement, for example to adjust to account for your state pension.
You can also add in up to three one-off withdrawals, bearing in mind that up to 25% of the account value can usually be drawn as tax free lump sums. Click “calculate” and on the graph below lines will appear plotting the balance left in your pension drawdown account over time using the two different investment returns, which you can also adjust.
How do I know if my pension fund will run out?
If the balance goes to zero, your projected retirement fund has run dry and your income will stop at this age along the bottom (x) axis. If the line does not go to zero this shows that there will be residual a balance in the drawdown account.
You can adjust the real investment return assumption as an annual percentage to show the impact of this on your fund value. You need to click calculate each time you change one or more of the input boxes.
You can then add in a one-off withdrawal and click calculate again a second plot (brown line) will show how this one-off withdrawal will impact the balance in your account over time. This will show you how much more quickly the fund will run dry, or how much lower the residual balance will be.
How does the drawdown calculator work?
The pension drawdown calculator projects forward a balance for the drawdown account adding on the set investment return each year and deducting the planned income withdrawals. If a one-off withdrawal is added in this is deducted from the drawdown fund balance at outset.
Important Tax & Investment Points to Consider When Using the Calculator
Tax Free Cash and Taxable Withdrawals
The drawdown calculator just looks at the gross withdrawals made from the pension fund, initially you may still have entitlement to your 25% tax free lump sum. After this withdrawals will be taxed as income before you receive them by your pension administrator.
If you are thinking of making a large taxed withdrawal you may wish to use our Pension Withdrawal Calculator to work out the tax you will pay on this and whether this can be reduced by spreading it over more than one tax year.
Real Investment Returns Net of Fees
The pension income drawdown calculator allows you to select a range of investment returns net of both fees and inflation. Whilst these returns might seem low remember you need to think about the returns you will make after the costs of running your drawdown account and after deducting inflation each year.
For example if an investment returns 5% gross, all the costs of running your drawdown account are 1.5% and inflation is 2% this will equate to a 1.5% real return net fees as per the pension return calculator.
Furthermore the calculator uses an average pension return with the assumption this is made year after year. In practice if you are investing actively some years will be good and some years will be bad, the average return must take account of the bad years as well as the good ones.
Remember if you invest actively the value of investments and the income they generate can fall as well as rise. The pension drawdown example shown through the calculator includes these factors.
Get Help and Advice
If you are in any doubt as to what is a reasonable income to plan to receive given the current size of your pension drawdown account, how long this income might be sustainable for given your life expectancy and how a one-off withdrawal will impact this, then get the help of a suitably qualified pension adviser.
IMPORTANT INFORMATION ABOUT OUR PENSION DRAWDOWN CALCULATOR
In an invested drawdown account your capital and the income it produces is at risk and can fall as well as rise, you may not get back all of your initial investment.
Excessive withdrawals will accelerate the decline of your pension drawdown account value, ultimately running it down to zero, after which further withdrawals will be impossible.
Any information contained within this page should not be deemed to constitute investment advice and should not be relied upon as the basis for a decision to enter into a transaction, or as the basis for any financial or investment decision. Investors should always seek professional advice in regard to the suitability of any investment transaction.
Tideway cannot be held responsible for any investment losses based on investment decisions made using this pension fund calculator without personalised advice from one of Tideway’s advisers.
What Are Annuities?
An annuity converts a capital sum into an income for life for an individual or couple, they are provided by UK authorised insurance companies and are very safe.
Who Can Buy Them?
With a pension fund you can by them from age 55 up to age 75 and the income they produce will be taxed as income at your marginal tax rate. You can buy an annuity with capital outside of your pension fund, the income from which is not all deemed as taxable income a portion is deemed the return of your original capital and therefore not taxed.
What Are the Key Advantages of An Annuity?
The key advantages are:
- Security – they are risk free and you get a fixed income and paid for life, irrespective of how long you live.
- Lack of responsibility – once bought you have no further responsibilities over looking after you capital and creating the lifetime income, its all done for you by the insurance company.
- There are options for the annuity income to increase each year and to pay out to a spouse for their life if they should out live you, of course these must be paid for in the starting income rate you receive.
What Are the Key Disadvantages of An Annuity?
The key disadvantages are:
- You lose control of your capital, and they are irreversible transactions, you can never get your capital back during your lifetime (see Note 1 below)
- They are inflexible, you get some options at outset as to whether to buy a level income, one escalating by a fixed amount or one linked to inflation, bit once made these decisions are permanent. You cannot increase your monthly payments or decrease or defer them
- Annuities are generally an expensive way to produce income because of the guarantees they offer. Returns from annuities will be particularly poor if you don’t live to an above average life expectancy. Because the insurance company has to guarantee the returns and continue to pay out to those who live longer than average annuity income rates are cautious and the returns you can make are limited to a return just over the yields on UK gilts even if you like well beyond age 90.
Why Are You Showing Me Annuity Rates in A Drawdown Calculator?
The annuity rate is a good place to start when you are considering embarking on income drawdown or, using drawdown in retirement where you are planning to generate a regular income for the rest of your life. Annuities are your ‘risk free’ option to create income in retirement and the rate of income you can buy is a good reference point and guide to sustainable drawdown rates (See Note 2).
In addition to the extra flexibility and control you get from using drawdown compared to an annuity, it should be possible to improve on the return and income offered by an annuity by:
- Holding your own risk of living beyond age 90, insuring against this risk by way of an annuity is expensive and your income needs beyond age 90 might be very different to those in the earlier years of retirement.
- Taking a modest amount of investment risk, it may not be achieved if too much investment risk is taken. In general terms the more risk you take the greater the possibility of failing to make the necessary return.
Note 3: the source of the annuity values is from Hargreaves Lansdown. You can review the data on their website.