How we do our retirement saving guidelines calculations
The rules of thumb do not take into account the product that your savings are in - whether you are saving in an ISA, or a pension, or anything else. In particular, this means that it does not take into account limitations or tax treatments of individual investment products. In particular:
- It does not take into account the Annual Allowance or Earnings Cap limiting the amount that you can contribute to a pension.
- It does not take into account tax relief on pension contributions, or any additional tax due on the income taken from those pensions.
The rules of thumb are based on an assumption that people invest in a diverse portfolio of different assets including some stocks and some bonds. Your own investments might carry more or less risk than what we have assumed, which will change your expectation of returns. In particular, if you have a high proportion of investments in a single business or property, our forecasting assumptions are unlikely to be relevant.
The rules of thumb presented in this tool are based on a set of generic long term assumptions for investment returns because we do not know when in the future you might be retiring. It does not take into account our current view of potential investment returns in the short term, and therefore if you are within a few years of retirement these rules of thumb are likely to be less appropriate for you. If you are close to retirement and want to understand more about your potential retirement income using drawdown or an annuity, .
Numeric assumptions
- We assume that prices rise at 2% each year - meaning that the income you take must also increase at the same rate to avoid a drop in your spending power over time.
- We assume that you have a life expectancy based on ONS National Life Tables; your actual life expectancy will vary depending on your age, your gender and whether we are planning on a joint basis or for an individual.
- We assume that you invest in a mixed portfolio of investments. We can provide more information about the underlying assumptions in the Detailed Investment Assumptions section below.
- We assume that household income is gross annual income (i.e. before tax).
Retirement Income
There are two ways of generating an income from your retirement savings - purchasing an annuity, or drawing down from capital. This tool is about what income you could potentially sustain, based on certain assumptions, if you choose to draw down. This means that you are taking a small amount of money out of your savings each year to provide yourself with an income, while the balance of your savings remains invested. There is a risk that you could take an income that is to high - and so run out of money before you die - that will depend on how much you take, and how your savings perform in retirement. We need to forecast how your savings might perform in retirement - see investment assumptions below.
Note that this analysis does not take into account the limitations or tax treatments of individual investment products, such as your tax free cash lump sum, or the tax due on any remaining income.
Detailed Investment Assumptions
- We assume that you invest in a portfolio containing 25% equities.
- In order to select an investment return for your investments before retirement, we ran a forecast looking at the potential range of different results this portfolio might get and how likely they are. From this range of results, we chose an outcome that you could expect to see 80% of the time or more based on the assumptions used in the forecast - under this scenario, your investments are assumed to grow at an average rate of 4.75% each year (or 2.75% above inflation) over those 43 years before you retire.
- In order to select an investment return for your investments after you retire: we ran a forecast looking at the potential range of different results this portfolio might get and how likely they are. From this range of results, we chose an outcome that you could expect to see 90% of the time or more based on the assumptions used in the forecast - under this scenario, your investments are assumed to grow at an average rate of 4% each year (or 2% above inflation) for the rest of your life.
Data
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