Pension Calculator

About the Pension Calculator

A defined benefit pension is not a pot. It is a promise of income, worked out from an accrual rate, your years of service and a salary figure — and it is the only retirement arrangement most people will ever have where the investment risk, the inflation risk and the longevity risk all sit with somebody else.

That makes it very hard to value and very easy to undervalue. "£22,916 a year" sounds smaller than "£400,000" even when it is worth considerably more.

So the central output of this pension calculator is the capital equivalent: the pot you would need to buy that income on the open market. It is usually far larger than people expect, and it is the only honest basis for comparing a defined benefit pension against a transfer value or a defined contribution pot.

How to Use the Pension Calculator

Enter the pensionable salary and years of service.

Accrual rate, 1 over — enter 60 for a 1/60th scheme, 80 for a 1/80th. This is the single biggest variable and a surprising number of members do not know which they are in. It is on your scheme booklet or annual statement.

Does it rise with inflation? Indexation is usually most of what the pension is worth.

The two annuity rates are what a level and an index-linked income cost to buy. Transfer value is only needed if you have been offered one.

Step-by-Step Example

£55,000 pensionable salary, 25 years of service, a 1/60th scheme, index-linked.

  25 ÷ 60 × 55,000  =  22,916.67 a year

That is 41.67% of salary, for life, rising with inflation, with somebody else carrying every risk.

The accrual rate does the heavy lifting:

A 1/60th scheme pays a third more than a 1/80th for identical service.

What It Is Actually Worth

To buy an index-linked income of £22,916.67 on the open market:

  22,916.67 ÷ 3.5%  =  654,762.00

Over £650,000 — a multiple of about 28.6 times the annual pension.

That figure is the one to carry around. Nobody describes a pension as "worth £650,000", and it is why defined benefit pensions are routinely given up too cheaply.

Why the index-linked rate is a separate input

There is a tempting shortcut here that is simply wrong, and it is worth naming because an earlier version of this calculator used it.

The shortcut is to take the level annuity rate and subtract inflation — 5% minus 3% gives 2%, so capitalise at 2%. That produces a capital equivalent near 50 times the pension, against the 20 to 30 times that real index-linked pricing and real transfer values actually run at.

The reason it fails: an annuity rate is not a discount rate. Most of an annuity rate is mortality, not yield. Subtracting inflation from it over-corrects badly. So the index-linked rate is its own input with its own default.

What Indexation Is Worth

The same £22,916.67 without inflation protection:

  Index-linked, at 3.5%:   654,762.00
  Level, at 5%:            458,333.40
                           ──────────
  Indexation is worth:     196,428.60

Nearly £200,000 of the value is the inflation protection alone, and it is the part people discount most readily because it does not show up in the headline income.

Over a 25-year retirement at 3% inflation, a level pension loses roughly a third of its real value. An index-linked one loses none.

Against a Transfer Value

If you are offered a transfer value, the comparison to make is against the capital equivalent — not against the annual income, and not against how large the number feels.

  Offered:              400,000.00
  Multiple of pension:  17.45 times
  Against 654,762 capital equivalent:  61.09%

A transfer at 17.45 times is well short of what the guarantee is worth on these assumptions. And the multiple is only half the point: transferring hands the investment risk, the inflation risk and the longevity risk to you, permanently and irreversibly.

There are legitimate reasons to transfer — poor health, no dependants, a need for flexibility, a scheme in difficulty. "The number is big" is not one of them.

Understanding Your Result

Annual pension is the income the scheme promises.

How it is worked out shows the accrual arithmetic and what share of salary it replaces.

What it is worth as capital is the headline finding.

Over a retirement shows cash and real value side by side, which is where indexation becomes visible.

Worth knowing compares any transfer offer, or names the capital figure to remember.

When Should You Use This Calculator?

When you have a defined benefit pension and do not know what it is worth. Which is most members.

Before responding to a transfer offer. Take regulated advice too — it is generally required above a threshold anyway.

When comparing jobs. A role with a 1/60th scheme and one with a defined contribution plan are not comparable on salary alone.

When considering leaving early. Every year of service is another slice of salary for life.

Common Mistakes

Comparing an income to a lump sum directly. Capitalise it first.

Not knowing your accrual rate. It changes the answer by a third or more.

Subtracting inflation from the annuity rate. It over-corrects and produces a figure nobody would recognise.

Ignoring indexation. It is often a third or more of the total value.

Judging a transfer value by its size. £400,000 is a large number and a poor offer at the same time.

Forgetting the scheme's other features. Spouse benefits, death-in-service cover and early retirement terms all have value this does not capture — which means the capital equivalent here is, if anything, an understatement.

Every figure here is an estimate for planning. Pension transfers are irreversible and normally require regulated advice, and this is not it.