Pension drawdown calculator — methodology

Step one: the lump sum comes out before anything is projected

Normally 25% of a defined contribution pot can be taken free of income tax. That money leaves the pot, so the projection opens on what is left — not on the whole pot with the cash subtracted at the end, which would grow money already spent for the whole term.

lump sum      = pot × tax-free rate
drawdown pot  = pot − lump sum

The rate is read from the rules file. The cap on it is not. See the limits section at the bottom.

Step two: the schedule

The projection runs in periods — a month, a quarter or a year, whichever the income is paid on — and every step is integer pence. The annual income you ask for is divided into that many equal instalments, and the withdrawal is taken last in each period, after growth and after charges.

balance ← balance × (1 + periodic rate)
balance ← balance − charges
balance ← balance − min(withdrawal, balance)

Two consequences of that last line, and they are the reason a drawdown page needs a schedule rather than a formula. The balance floors at zero: a request larger than the pot is truncated to what is there rather than driving the balance negative. And once a payment cannot be made in full, the income stops for good. The page reports the period of that first short payment, which is earlier than the period the balance reaches zero and is the answer the reader needs.

It also means the taxable income this page taxes is what the pot actually paid, read back off the schedule’s withdrawal column, rather than what was requested. Taxing the request would charge tax on money that never left the pot, on exactly the inputs where the plan is failing.

Step three: the largest income that lasts the term

“What could I take and still have it last?” is solved by bisection on the withdrawal: the largest per-period amount for which every requested payment is made in full, right through to the final period. One penny more and it is not. The solver runs the same projection loop as everything else, so its answer cannot disagree with the schedule it produces.

The residual left at the end is small but not zero, and cannot be zero in general — the pot moves in whole pence and in steps of roughly a period’s growth, so between the largest withdrawal that survives and the smallest that does not there is a discrete jump.

That figure is arithmetic and is not a recommendation. It is not a rate anyone has judged prudent, it is not adjusted for how long anybody lives, and it moves whenever the growth assumption moves. This site publishes information, not advice, and this is the figure on it most likely to be mistaken for advice, so it is worth saying twice.

Step four: the tax, which is where the other income matters

The part of a drawdown that is not the tax-free lump sum is taxed as earned income in the tax year it is taken. It is not a separate charge with its own rates: it goes on top of everything else taxable you receive that year and is charged at whatever rates that income has already reached.

taxable income = other income + withdrawal actually paid
income tax     = computeTaxPosition(taxable income, region, tax year)
tax caused by
the drawdown   = income tax with it − income tax without it

The last line is a measurement rather than a rate applied to the withdrawal, and it has to be: the withdrawal frequently spans two or three bands, and inside the personal allowance taper it is charged at a rate that appears nowhere in the rates table. A calculator that asks “are you a basic or higher rate taxpayer?” and applies one rate to the whole withdrawal cannot be right for anyone whose withdrawal crosses a threshold — which is most people taking a large one.

Why a large withdrawal can cost more than 60% at the margin

Above £100,000 of total income the personal allowance is withdrawn at £1 for every £2 of income. So a pound taken in that zone is taxed at its band rate and exposes another £0.50 of income that the allowance had been covering.

marginal rate in the taper = band rate × 1.5

At the 40.00% higher rate in England, Wales and Northern Ireland that is 60.00%. In Scotland it is higher again, because the band rate it multiplies is higher. The zone is £25,140 wide, and the whole of a one-off withdrawal counts as income in a single tax year — which is how an ordinary reader ends up inside it without ever having had that much income before.

What drawing an income does to what you can pay in

Taking taxable income from a defined contribution pot — as distinct from taking only the tax-free lump sum — triggers the money purchase annual allowance. From that point the most that can go into money purchase pensions each year with tax relief falls from £60,000 to £10,000. It cannot be undone and unused allowance from earlier years cannot be carried forward against it.

Two limits on how this page reports that. The annual allowance taper is not applied: it depends on threshold income and adjusted income, two statutory measures with their own definitions — broadly, income excluding pension contributions and income including employer contributions — which this page does not ask for, so feeding it a total income figure would produce a confident answer to a question the reader was never asked. And the allowance is reported as one flat limit, where a member who has triggered the money purchase allowance and also accrues a defined benefit pension really has two: the money purchase cap on contributions and a separate alternative annual allowance on the defined benefit accrual, which can itself be tapered.

Carry forward is deliberately not offered on this page. It needs contributions and allowances for each of the three prior years, which this page does not collect — and it cannot be set against the money purchase annual allowance in any event, so on the very page where a reader has just triggered that allowance it would be the wrong answer as well as an unanswerable question.

Rates and allowances

Thresholds are taxable income, after allowances. The Scottish bands apply to a pension withdrawal because it is earned income and income tax on it is devolved.

Sources

• gov.uk — Income tax rates and allowances: current and pastThe withdrawal is taxed as earned income, so the ordinary income tax bands and the personal allowance taper are what apply to it.
• gov.uk — Tax when you get a pension
• gov.uk — Pension schemes rates and allowancesFor the annual allowance and the money purchase annual allowance. The lump sum allowance is published here too and is deliberately not modelled — see the limits section below.
• gov.scot — Scottish income tax rates and bandsIncome tax on a pension withdrawal is devolved, so a Scottish taxpayer meets a different set of bands — and a different marginal rate inside the personal allowance taper.

The verification, and the half of this page it covers

That stamp covers the tax calculation only. It is a check on the published rates, thresholds and allowances in the rules files, and it does not reach the projection at all — there is no published figure in the growth rate, the charge or the term for anyone to check, which is why the note above says the projection makes an arithmetic claim and no other.

The bounds on the input fields, and why they are not round numbers

• Growth is floored at -99%, not −100%. The projection engine rejects an annual rate of exactly −1 — a total loss is not a growth assumption — and the field’s clamp is inclusive, so a floor of −100 would be an unhandled error reachable by typing a minus sign. The income escalation is floored at -99% for the same validator.
• The charge is capped at 5% a year. The solver that finds the largest income lasting the term bisects, and bisection is only trustworthy while its objective is monotone — which fails when a periodic charge exceeds the balance it is charged on. That needs more than 1,200% a year at monthly periods, so the cap discharges the precondition rather than a guard doing it after the fact.
• The tax-free lump sum is capped at the rate, 25%. That is the only part of the tax-free lump sum the tax engine models.
• An empty field means zero, not the bottom of the range. Clearing the growth box asserts no growth, which is what “I have not told you a growth rate” means. It does not assert the -99% at the floor.

Limits that change the answer, stated here rather than buried

• The lump sum allowance is not applied. The tax-free 25.00% is a verified figure; the cash cap on it is not in the tax engine’s schema at all. On a pot large enough for 25% to exceed the allowance, this page shows more tax-free cash than could actually be taken, and therefore too little tax. Check the allowance on gov.uk.
• Emergency tax on a first withdrawal is not modelled. Providers commonly operate a month-1 code on a first flexible payment, taxing it as though it were the first of twelve identical payments. Far too much comes off and it is reclaimed afterwards. This page shows the tax-year position, which is where you end up, not what comes off the payment.
• One tax year’s tax, on one pot. The tax figures describe the first year. The projection runs for the whole term, but it does not re-tax each year’s income against a future year’s bands, because nobody knows what those bands will be — the calculator offers the tax years it has rules files for and no others.
• Defined benefit pensions are not modelled anywhere on this page, and neither is an annuity bought with the pot, nor the treatment of a pot inherited on death.