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How to use a pension drawdown calculator

pension drawdown calculator

How to use a pension drawdown calculator

Have you planned for your retirement? If you have a pension, do you understand how much your monthly income will be? Pension rules have changed and you have more freedom now to decide how you want to manage your pension pot. You can take out a lump sum and leave the rest for income, but you’ll need to decide how much to draw down and how much income you think you’ll need to live on. To work out the figures, you’ll need to use a pension drawdown calculator.

What is a pension drawdown calculator?

When you’re deciding how much of your pension pot to draw down, you’ll need to understand how it’s going to affect your future income stream. If you draw down too much you could find yourself short of income in the future, but if you only draw down a minimal amount, you might not be making the best use of your capital to fulfil your present goals. The way to sort out this quandary is to use a pension drawdown calculator. This is a financial calculation tool that will allow you to work out how much you can draw as a lump sum and how much income you can take without draining your assets too quickly.

Where will I find a pension drawdown calculator?

Most of the large pension providers, asset management firms and financial advisers include a range of calculators on their websites, including a pension drawdown calculator. You will need to know how much money you have in your existing pension fund and then you can use the calculator to postulate different lump sum drawdowns and how they would affect your ongoing income.

Points to consider when using a pension drawdown calculator

How to use your pension pot to your best advantage is a complex decision and for most people professional advice from an asset manager or financial advisor is critical. However, as you start to think about your future income, here are some points to bear in mind:

  • For a retirement income spanning up to 30 years, it used to be thought that an annual drawdown of four percent would protect the value of your capital. However, more recently, as investment returns have weakened, it’s generally recommended that two-and-a-half percent is a safer drawdown level.
  • You’ll need to think about what your target annual income needs to be, what age you’ll start to draw your pension income, what amount you would want to take out as a lump sum withdrawal and what the annual investment return of your pension is likely to be.
  • You need to be aware that if you take a large lump sum up front, the value of your pension income could fall significantly in later years, and given that we’re all living longer, this is a very real danger.
  • You need to balance the risk of drawing a higher income level in the early years of your retirement against a diminished income in your latter years—and if you’re retiring relatively early, you may have many years left to live.

Using a pension drawdown calculator will help you with the figures, but taking professional advice from an expert is essential for such a far-reaching financial decision.

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