Uses of the calculator
This calculator is intended to be used to illustrate the principles of the transfer of risk from scheme to member when you take a Cash Equivalent Transfer Value (CETV) offered by a previous employer and use it to generate a replacement ‘income’ from a personal pension plan under your own control. The replacement income assumes drawing down from the portfolio rather than (at any stage) buying an annuity. The calculator deals only with comparisons of gross income and ignores other factors that may affect and could even dominate a decision to transfer, such as spouse benefits, state of health, tax free cash and intentionally varying the time profile of the income. A full advice process will consider all factors.
The maths behind itThe calculator is a stylised version of Fowler Drew’s proprietary stochastic (probabilistic) drawdown model. The driver of the model is a real equity return process at the market level which is mean reverting and at medium and long horizons has a log-normal distribution. The full version is able to cope with complex risk preferences, draw rates and tax treatment and is designed to support holistic retirement planning across multiple sources of capital, not just pension accounts. Both versions of the model assume a ‘liability-driven’ approach to decisions made jointly about i) the way the capital is invested and ii) the planned draw amounts. This allows a plan to be divided into multiple cash-flow horizons, typically of one year each. Tolerances can be set around the cash-flow outcomes based on personal considerations. A portfolio can then be assembled and managed dynamically (on a discretionary basis) over the life of the plan to ensure consistency with those tolerances. All planning inputs can and should be regularly revisited in the light of personal circumstances and the progress of the portfolio.
The small printThough you are invited to input some personal data to the calculator and to select pre-stored risk approaches, the outputs of the calculator are not intended to be, and cannot be construed as, a personal recommendation either to transfer or retain the DB pension. All amounts shown are estimates derived from a model of the different risks affecting a drawdown plan and no model can be a perfect representation of actual effects. The amounts themselves are not necessarily representative of any different approach to the management of the portfolio formed from the CETV amount or of different ways of deciding how much to draw. The risk descriptions are specific to the stylised model and its application to a notional retirement goal, rather than general to an individual or personality, and are not necessarily applicable in any other context.
In calculating the present value of your deferred pension, we use a discount rate of 2% per annum. This translates your projected pension at retirement to a value that can be used today. Where you only know your pension amount when you left the scheme, we uplift the amount by 3% per annum as an approximation of the expected RPI uplift in your pension to value it in today's terms.