Calculator: how long will your pension pot last?

For people overseeing investment portfolios into retirement, one of the major challenges is drawing an income without running out of money in the process. Too conservative and you might not make the most of the money you have; too extravagant, and you could find yourself in the precarious position of burning through your capital.

Generous work pension schemes are becoming few and far between and recent pension “freedoms” mean that, more than ever, savers are likely to avoid or delay buying an annuity with their pension savings.

More investors face the issue of overseeing a finite portfolio which may be required to generate an income for an indefinite period.

Telegraph Money has created a new calculator which helps address the problem: it allows you to work out how long a portfolio will last, given a range of scenarios relating to investment returns, the size of annual withdrawals and whether or not to take a lump sum out of your portfolio at the outset. This is often the case with pension portfolios, where up to 25pc may be drawn tax-free.

What’s a safe level of income to take?

Much work has been undertaken to help investors and their advisers develop guidelines for sustainable drawdown of capital.

Until recently, 4pc was considered by many to be a “safe” or sustainable level of income to take from a pension pot without taking excessive risk of the capital draining away during a pensioner’s lifetime.

This assumes average returns from a mixed portfolio of investments and a retirement spanning 30 years.

But the 4pc figure was based on data from American equity returns, and other analysis suggests that in the UK the real figure may be as low as 2.5pc.

The basis of the 4pc rule was formed by average investment returns for a period that did not reflect the low growth of recent decades.

In any case, history suggests that British shares have delivered very different returns from their American counterparts.

Between 1900 and 2015, UK shares averaged 9.3pc return per annum – but with some serious volatility along the way. The latter half of the 20th century was excellent for shares, for example, while the first half was not.

Interesting work by London-based fund group Sarasin highlights this difference in phases.

Sarasin calculated that for your capital in 2015 to have the same real value as in 1965, you could have drawn a maximum 5.2pc per year.

That’s because that period covered extended bull markets in the Eighties and Nineties.

But when Sarasin worked out the numbers for the longest possible period – that’s 116 years from 1900 to 2015 – the maximum annual deduction is a much reduced 3.8pc.

That’s because it took a great many decades for shares to regain their real value after the crash of 1929.

Most advisers reckon it is far more sensible (if you can afford it) to make percentage-based withdrawals from your portfolio rather than fixed,

Our new online tool works out how rapidly capital is depleted in a range of scenarios

nominal amounts. This prevents the damaging effect known as “pound cost ravaging”, whereby capital values are eroded faster because more shares are sold at lower values.

It is better where possible to adjust withdrawals depending upon performance.

In excellent years where capital values are up, income withdrawal can be increased – but perhaps not to the full extent of the gains.

In protracted periods of low returns or falling capital values, prudent investors need to tighten their belts and draw less income from their pot in order to avoid selling stock and crystallising losses.

The formula behind this new calculator has been provided by specialist pension advisers Tideway Investment.

Find the calculator – and many others relating to pensions and investment – by going to telegraph. co.uk/pensions-retirement.

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