You may have tried to determine the future value of your pension using an online calculator.
However I find these calculators to be very generic with no indication of the math behind it.
Which is why MYB created its own Realistic Pension Calculator that uses the following criteria:
The Realistic Pension Calculator starts by setting your starting age, year, amount and salary.
You then input your average annual salary increase and annual pension growth percentage.
It also asks you for the lower and upper limit of qualified earnings for your current tax year.
Finally it asks you for your contribution percentage as well as your employer’s and tax relief.
In this article, I discuss how this is the most realistic pension calculator compared to others.
I also explain some of terms related to pension calculations, such as your qualified earnings.
Finally, I invite you to give it a go yourself and calculate your pension value after 10-30 years.
Input your Starting Age, Year, Amount, and Salary
The first part to the Realistic Pension Calculator is to start off inputting some basic variables:
- Starting Age: What age did you start contributing to your pension? 25 years old for example.
- Starting Year: What year did you start contributing to your pension? Say 2020 for example.
- Starting Amount: What is the starting balance of your pension? £0 if you’re just starting out.
- Starting Salary: What was your salary when you started contributing? £30,000 for example.
There are a couple of ways you can use the calculator, depending on where you are in life:
- First job: You may be starting work for the first time and are just contributing from scratch.
- New job: You may be moving jobs and want to see what your pot can be with your new salary.
Whatever your case, use the Realistic Pension Calculator in the way that works best for you.
Please note the calculator only displays 30 years. If you want this longer, please let me know!
Input your Annual Salary and Pension Growth Percentage
Let’s start by discussing the easier variable: your average annual salary growth percentage.
Most calculators ask for your current salary, and use it to calculate your pension over 30 years.
That’s crazy: your salary increases every year by a certain percentage, let alone over 30 years!
The Realistic Pension Calculator is very aware of this, which is why it takes this into account.
For most employees, this can be from 3-5% depending on the employer, inflation, profits, etc.
The next variable to discuss is the estimated annual pension capital appreciation percentage.
Most calculators use a certain growth percentage, but don’t share what that percentage is.
If your pension is invested in stocks and shares, that means it should be growing on average.
If you’re unsure what your pension is invested in, speak to your pension provider to find out.
If your pension is invested in index funds, I would assume an annual growth of around 8-10%.
Input your Qualifying Earnings Limits
What the heck is ‘qualifying earnings’ you ask? Allow me to explain, I didn’t know this either:
Have you ever looked at your payslip and think how your pension contribution is calculated?
Let’s say that you contribute 4% of your monthly income – it’s not 4% of your gross income.
It’s 4% of your qualifying earnings – most employers use this to calculate their contributions.
Why is it used as opposed to just our gross salary earnings? I don’t know, just to confuse us.
So to calculate your qualifying earnings, you would need to know the lower and upper limits.
These figures are reviewed annually, but for the 2022/23 tax year it is £6,240-£50,270 a year.
This means you contribute a percentage of your gross income that fall between these figures.
Say you make £20,000 a year; your qualifying earnings would be £13,760 (£20,000 – £6,240).
You and your employer would then calculate your contributions based on this given figure.
Input your Contribution Percentages
The final step is to input you, your employers contribution, and tax relief percentages.
As mentioned above, contributions are made on your qualifying earnings, not your full salary.
The legal minimum that must be paid into your pension is 8% a year of qualifying earnings.
At least 3% must be paid by your employer. The usual split is 5% employees/3% employers.
Some employers are more giving than others: I know employers that pay 12% contributions!
Another thing to note is that you get tax relief from the government on pension contributions.
This means that some money that would have gone as tax goes towards your pension instead.
So rather than paying 5%, you actually pay only 4% because 1% comes from the government.
As you can see, the Realistic Pension Calculator calculates your qualifying earnings for you.
It uses this to calculate your contribution amounts based on the percentages you specified.
See how much your Pension could be worth after 10, 20, 30 years
After you input your variables, it’ll calculate how much your pension could be after 30 years.
I say could be because this is just an estimation, who knows what could happen over 30 years!
For example, let’s input: 30, 2022, £100, £45,000, 10%, 3.33%, £6,240, £50,270, 4%, 3%, 1%.
If we plug these variables into the calculator, we can see the table shown in the image above.
In 10 years, our pension could be close to £70,000. In 20 years, it could be almost £250,000.
After 30 years, our pension could be almost £700,000, that’s 10x the value of that of 10 years.
While these figures seem great, one thing to note is that even your pension pot is taxed.
That’s right, you would not keep the full £700,000; you would still have to pay tax on this.
Have a go at using the Realistic Pension Calculator to see what you pension could be worth.
By playing around with the inputs, you’ll see if you are on track to meet your retirement goals.
If you’re interested to find out more about early retirement, check out: Quit Like a Millionaire.
In the book, the authors talk about how they were able to retire early in their thirties!
To find out more on investing and retirement, check out my investing and retirement articles.
I talk about early retirement strategies, which funds to invest in, and which accounts to have.
Are you on your way to early retirement? Are you investing? Let me know in the comments!
