The Calculator's Strategy

A look under the bonnet at the tax-efficient logic used in the simulation.

Tax-Efficient Withdrawal Strategy (The "Waterfall")

This calculator is more than just a simple projection tool; it uses a sophisticated, tax-efficient strategy to model your pre-retirement savings and then your post-retirement income. To meet your annual income target, the calculator doesn't just take money from a single pot. It follows a smart "waterfall" logic each year to minimise your tax bill:

  1. Guaranteed Income First: It starts by accounting for all your guaranteed income for the year (State Pension, DB Pensions, and any "Other Income" you've entered). This is your reliable income floor.
  2. Use Existing Crystallised Funds: If you have already taken a TFLS, you will have money in your Crystallised pot. The calculator draws from this taxable pot first to meet your income needs.
  3. Fill Up Your Personal Allowance: Next, it strategically withdraws just enough from your Uncrystallised SIPP to use up any remaining Personal Allowance for the year. Because 75% of this withdrawal is taxable (and is now covered by your allowance) and 25% is tax-free, the entire amount you take out at this stage results in a £0 tax bill.
  4. Take from ISAs: If more money is needed to meet your annual target, the calculator then turns to your ISAs. All withdrawals from ISAs are completely tax-free.
  5. Final SIPP Withdrawals (Taxable): Only if your ISAs are empty and you still need more income does it go back to your Uncrystallised SIPP for further withdrawals. It is these final withdrawals that are typically subject to income tax.

Example, To Achieve a £33,520 Joint Income with £0 Tax (in today's value terms)

The smart withdrawal strategy above makes it possible for a couple to generate a significant income with no tax liability. Here's how, using the current Personal Allowance of £12,570:

  • The Method: To get a taxable portion of £12,570 from an uncrystallised SIPP (the 75% part), a gross withdrawal of £16,760 is needed (£12,570 / 0.75).
  • The Result: From this £16,760 gross withdrawal:
    • £4,190 (25%) is tax-free cash.
    • £12,570 (75%) is the taxable portion, which generates £0 tax as it's cancelled out by the Personal Allowance.
  • The Take-Home Pay: The full £16,760 is received completely tax-free by that person.
  • For the Couple: When the second person does the same, their combined tax-free income is £16,760 + £16,760 = £33,520.
Important Note: This tax-free strategy is most effective in early retirement years before your State Pensions begin. Once your State Pension starts, it will use up a large portion of your Personal Allowance, reducing the amount of SIPP income you can take tax-free.

Fairness and Flexibility

  • Proportional Withdrawals: To ensure fairness between partners, when the calculator needs to draw from a type of pot you both own (like ISAs or SIPPs), it withdraws proportionally. If Person 1 has 60% of the total ISA value and Person 2 has 40%, it will take 60% of the required ISA withdrawal from Person 1 and 40% from Person 2.
  • Manual Tax Free Lump Sum (TFLS): The yearly breakdown table allows you to take additional, ad-hoc Tax-Free Lump Sums for specific goals. However, be aware of the consequences:
    • It may increase your tax bill. If you still need to draw your regular income in the same year, that income is now more likely to come from a taxable source (your newly crystallised pot), which can create an unexpected tax bill.
    • It reduces future growth. Every pound taken out as a lump sum is a pound that is no longer invested and compounding for your future. Taking a large sum early can cause your pot to run out years sooner, you can experiment with this feature in the calculator to see the effects.
  • Flexible Spending with Frontloading,: This feature is a different way of receiving a higher income in the early, more active years of your retirement. You can set a percentage boost to your target income, which the calculator will then smoothly reduce back to your baseline target over the first 20 years of retirement, then onward over the next 20 to the minus % of your input. This is useful for planning larger expenses like travel while you're younger. But as all money comes from somewhere; taking more up front means having less income in later years!

Disclaimer: This calculator is for illustration only. It is not financial advice, and it can’t predict the future. Results are based on your inputs and assumptions, which may not reflect real-life outcomes. Investments can fall as well as rise, and you may get back less than you invest. You remain responsible for your financial decisions and may wish to seek professional advice.