How the Pension Calculator Works
A pension is money you save during your working life so that it can pay you an income when you stop working. The Pension Calculator answers two questions. First: how big could my pension pot be on the day I start it? Second: how much monthly income could that pot pay?
What you enter
- Current age and pension age: how many years the pot has to grow.
- Current pension pot: what you have saved so far.
- Your contribution and your employer's contribution: what is paid in each month. Many workplace pensions add money from the employer.
- Yearly increase: how much you raise the contributions each year, for example when your pay goes up. Leave it at 0 to keep them flat.
- Return until pension age: the yearly growth you expect on your investments.
- Inflation: how fast prices rise. It is used to show amounts in today's money.
- Years the pension must last, and return while drawing it: how long you want the income to run, and how much the money still earns while you spend it.
Step 1: growing the pot
For every month until your pension age, the pot earns a month of growth and then the contributions are added:
new pot = old pot x (1 + monthly return) + your contribution + employer contribution
The monthly return is the yearly return divided by 12. If you raise the contributions each year, the amount grows at the start of every year. The pot at the end is your projected pension pot.
Step 2: turning the pot into income
To see the monthly pension, the calculator spreads the pot over the years you want it to last. The pot keeps earning the return you set for retirement, and the payment is a level amount each month until the money runs out. With a monthly return of r, n months and a pot of P:
monthly pension = P x r / (1 - (1 + r)^-n)
If the return in retirement is 0%, the pension is just the pot divided by the number of months.
Step 3: today's money
$1,000 in 35 years buys much less than $1,000 does now. So the calculator divides the pot and the pension by the effect of inflation over the years, to show what they are worth in today's terms.
A worked example
You are 30 with $25,000 in your pension. You pay in $500 a month, earn 7% a year until 65, and inflation is 2.5%. You want the pot to last 25 years, earning 4% while you draw it.
| Result | Amount |
|---|---|
| Pot at age 65 | $1,188,181 |
| Pot in today's money | $500,665 |
| Total you paid in, with the starting pot | $235,000 |
| Growth on top | $953,181 |
| Monthly pension for 25 years | $6,272 |
| The same pension in today's money | $2,643 |
More than 80% of the pot is growth, not money you paid in. Now see what happens if your employer adds $250 a month: the pot at 65 rises to $1,638,445. If you also raise your contributions by 3% a year instead, the pot rises to $1,561,238.
Chart: the pot over the years
The same example, in thousands of dollars. The pot grows slowly at first, then faster, because the growth itself starts to earn growth:
Age 30 █ 25 Age 35 ██ 71 Age 40 █████ 137 Age 45 ████████ 230 Age 50 ████████████ 361 Age 55 ██████████████████ 548 Age 60 ███████████████████████████ 813 Age 65 ████████████████████████████████████████ 1,188
Ways to a bigger pension
- Start early. The early years matter most, because that money has the most time to grow.
- Take the employer match. It is extra money you would not otherwise get.
- Raise your contributions when your pay rises.
- Start later. Each extra year of work adds a year of contributions and growth, and takes a year off the time the pot must last.
What this calculator does not include
- Government or state pensions, which may add to your income.
- Fund charges and fees, which lower your return. Take them off the return you enter.
- Income tax on the pension you draw, and any tax relief on contributions.
- Ups and downs in the markets. A steady return is an assumption, and real returns vary from year to year.
- Defined-benefit pensions, where your employer promises a set income based on your pay and service. Check your scheme's statement for those.
This tool gives an estimate for general information only. It is not financial or investment advice. For a plan built around your own situation, talk to a qualified adviser.