A Calculated Look at Pensions: Comparing Pension Calculators

A 2024 report from Standard Life found that 1 in 3 Gen Xers don’t know what their savings will amount to at retirement, highlighting how tricky planning for retirement can be - and the need for clear and reliable guidance. 

Many people will turn to an online pension calculator as a first step, but these tools often provide very different results depending on which provider they use.

I compared pension calculators from a number of leading brands using three profiles: 

• Female age 30, earning £35,000, starting with £0 in their pension pot

• Female age 40, earning £35,000, starting with £50,000 in their pension pot

• Female age 50, earning £35,000, starting with £100,000 in their pension pot

Across all profiles, I assumed a 5% personal contribution, a 3% employer contribution and a retirement age of 65.

The estimated pension pots I got from different providers varied by as much as 50%. For one profile, this meant a difference of almost £70,000 - which could have a significant impact on someone's retirement planning.

Why do pension calculator estimates vary?

Pension calculators use several assumptions to estimate pension pots. The three key variables are:

1. Fund performance - providers estimate annual growth rates between 2.9% and 6%, which can make a big difference over decades

2. Inflation - Inflation estimates are more consistent but they do vary, ranging from 1.5% to 3%

3. Charges - These have the widest variation, from 0.41% to 1.5%, which can significantly reduce the size of pension pots over time

The assumptions used have big impacts on the results. Assuming higher charges or lower growth projections leads to more conservative estimates. Making more optimistic assumptions around fund performance, meanwhile, leads to much higher estimates.

Obviously there is no perfect way of making an estimate, given the number of unknown variables. The fact that the results of pension calculators are just estimates is usually made clear to the customer, although this can sometimes be hidden within FAQs. But overreliance on one calculator could result in under saving if its assumptions are too optimistic. To improve customer outcomes, best practice would be for providers to show the uncertainty in their calculators by providing a range or potential variance based on estimates of high or low growth. This will allow customers to make more informed decisions.

It’s also a good idea for customers to use multiple calculators to get a range of estimates. Using multiple calculators may also improve customer understanding around the impact that fees have on their portfolio. If they are with a provider that charges high fees, this might make them realise that they may not be getting the best value for their retirement savings.

Examples of Good Practice

Some of the calculators stood out to me for their transparency and user-friendliness. Some examples include:

PensionBee: The calculator includes a shaded area around the projected growth line on their graph, showing low and high growth scenarios. This helps customers visualise a potential range of outcomes.

Hargreaves Lansdown: The tool lets users adjust growth rates and charges with “advanced options”. This flexibility allows customers to test different scenarios. Hargreaves Lansdown also provides a good visual representation of how increasing your monthly contributions impact the final pot.

Lloyds Bank: The journey includes a chart to show how living standards are factored into their target retirement income estimates.

Several other providers also have similar tools to help users estimate their expenses in retirement. While these are useful, it’s unclear whether some factor in inflation, which could lead to misleading estimates.

A Way to Improve Trust?

Data from our Autumn 2024 Customer Experience ratings shows that pension customers between the ages of 46 and 64 report the lowest levels of satisfaction and trust of all age groups. One reason for this could be levels of anxiety around the size of their pensions as they approach retirement. By improving the transparency of these tools it could be a way to increase trust for customers who are unsure about the size of their retirement savings. 

Final Thoughts

Pension calculators are a valuable tool to improve customer understanding. They have the potential to help people find out if they’re saving enough for retirement. 

However, their usefulness depends on how clear they are when presenting their assumptions and limitations. It needs to be made transparent that these tools are a guide, that assumptions have been made as part of the calculation, and there is uncertainty around the figure provided.

With greater transparency and more use of good practice - such as those discussed above - customer understanding and trust in pensions can be improved.