Give your pension plan a reality check

• These figures are only illustrative.
• You may also have other sources of income which you are considering using for your retirement.
• This illustration shows, in today's prices, the pension that might be payable on retirement. This means that we have allowed for future inflation to give an indication of how much someone might be able to buy with a pension if it were payable today.
• The State Pension Age is 65 for men. The State Pension Age for women (60) will increase gradually from 2010, so that by 2020 it will be 65. Between 2024 and 2046, the State Pension Age for both men and women is expected to increase from 65 to 68. The tool reflects these changes made to the State Pension Age.
• If retirement is earlier than the assumed State Pension Age, your projected income on retiral will not include Basic State Pension.
• If retirement is earlier than the age the pension income entered on the Pension Income page starts then your projected income on retiral will not include that pension income.
• The value of investments can vary from this illustration. As such, these figures are not guaranteed.
• These figures do not take into account any tax that might be incurred if the fund(s) in the pension plan(s) exceeds the Lifetime Allowance. More information can be found in the Tax section below.
• All firms use the same rates to show how funds may be converted into pension income.
• The minimum required to be paid towards a pension may be determined by the product rules of that pension, or by your employer for company pensions. There is generally no maximum payment, however there are tax implications as described below of paying more than an amount set by HM Revenue & Customs in a tax year or accumulating more than the Lifetime Allowance in total across all your pension funds.

Tax

The Government changed the tax regime for pensions on 6 April 2006. In the new regime set by HM Revenue & Customs, the maximum payment eligible for tax relief that you or a third party (excluding your employer) can make to a pension plan is the greater of 100% of your relevant UK earnings (broadly annual salary), subject to the Annual Allowance, and £3,600 each year. The maximum total payment, including your employer's payment, eligible for tax relief that can be made to a pension plan is the Annual Allowance.

The Annual Allowance for tax relief on payments you, your employer and any third party can make for the tax year 2010/2011 is set at £255,000. Payments above the Annual Allowance will be subject to a tax charge. The Annual Allowance will be maintained at the 2010/11 level of £255,000 for a further 5 years up to and including the tax year 2015/2016. This will restrict the amount of payment to a pension scheme that can be made without being liable for the Annual Allowance charge.

From 6 April 2011 the amount of tax relief available for payments to a pension plan will be restricted for those individuals:

• who's gross income before the deduction of income tax, National Insurance contributions, charitable donations and pension contributions, whether paid directly or via a salary sacrifice arrangement, is £130,000 a year or more; and
• who's gross income above plus the value of any pension benefit received from their employer or a third party, is £150,000 a year or more.

The tax relief will be reduced gradually from the individual's highest marginal rate of income tax to the basic rate of income tax as gross income plus the value of any pension benefit received from their employer or a third party increases from £150,000 to £180,000, staying at basic rate for income and pension benefits above £180,000. A Special Annual Allowance charge will be used to ensure correct application of tax relief in these circumstances. This tool does not reflect the restriction of tax relief or the Special Annual Allowance charge, and so may overstate the projected pension income.

There is also a Lifetime Allowance that applies to the total pension funds that are used to provide benefits to you. Payments from total pension fund(s) in excess of the Lifetime Allowance may be subject to a tax charge. The Lifetime Allowance for the tax year 2010/2011 is set at £1,800,000. The Lifetime Allowance will be maintained at the 2010/11 level of £1,800,000 for a further 5 years up to and including the tax year 2015/2016, when it will be reviewed again.

Tax rules and legislation may change. The value of tax relief may change and will depend on your financial circumstances. The information we have given is based on our understanding of law and HM Revenue & Customs practice at today's date.

Assumptions

• The illustrations assume an annual growth rate of 7% and an annual management charge of 1%. A higher (or lower) annual management charge may apply depending on the actual funds your pension is invested in. In this case, your projected income would be lower (or higher) than the figure shown here.
• When determining the values in today's terms, inflation in the Retail Prices Index is 2.5% each year.
• Payments into this plan are assumed to increase at 4% each year. Salary escalation is assumed to take place 12 months from today and therefore the pension projection may be underestimated if there is a salary increase before the end of this 12 month period.
• The first pension payment will be paid on the birthday during the year of retirement and will be paid every month from this date until death.
• The pension will alter in line with the Retail Prices Index each year from the time it starts. We have assumed the Retail Prices Index will increase by 2.5% each year.
• We have assumed you are currently exactly six months older than the age entered.
• On retirement, you'll be married (if you are in a civil partnership or single the projected income is likely to be different) to someone three years younger than you (if you are male) or to someone three years older than you (if you are female).
• Your spouse will get half your pension after you die.
• We have assumed a single person's allowance for the Basic State Pension on the basis that your spouse is entitled to a full Basic State Pension in their own right. If this is not the case and you are entitled to the full married couple's Basic State Pension, your Basic State Pension would be higher than the figure used in this illustration by £3042.52 (for 2010/11 tax year) each year.
• Where Basic State Pension is included, we have assumed you have 30 qualifying years for a full Basic State Pension. We have assumed that the Basic State Pension is altered in line with the Retail Prices Index in each future year.
• We have assumed an initial target income of 2/3rds of your income each year before deduction of income tax and National Insurance contributions. This can be changed later in the tool.
• We have assumed that any Defined Benefit pension income changes once in payment are in line with the Retail Prices Index.

We have assumed that:

• you have no taxable income at retirement other than the total projected income;
• you are eligible for the standard single person's personal allowance for your retirement age, but not eligible for any other income tax allowances;
• personal allowances and tax rate thresholds increase each tax year from 2010/11 in line with inflation in the Retail Prices Index; and
• tax rates and rules remain unchanged from those applicable in the 2010/11 tax year.