The five moving parts
In brief: Every retirement projection is built from the same five components: income, spending, assets, tax, and time. Understanding what each one represents — and how they interact — is the foundation for making sense of your results.
Retirement modelling can seem complex, but every projection is ultimately built from the same five building blocks. Before diving into specifics like pension types or tax bands, it helps to understand these components at a high level.
1. Income
Income is money flowing in. During your working years, this is mainly your salary. In retirement, income typically comes from several sources:
- State Pension — the government pension based on your National Insurance record
- Workplace and personal pensions — money you've saved during your career, drawn down in retirement
- Other income — rental property, part-time work, annuities, or any other regular income
The mix of income sources matters because each is taxed differently. A key part of retirement modelling is seeing how these sources combine and interact over time.
2. Spending
Spending is money flowing out. This includes your day-to-day living costs, housing costs, leisure, travel, and potentially care costs in later life.
Spending in retirement is rarely a single flat number. Most people spend more in the early, active years and less as activity slows — though care costs can add a significant layer later. Modelling spending as distinct phases over time produces a more realistic picture than a single annual figure.
3. Assets
Assets are where your money sits. Different types of assets have different rules:
- Pensions (SIPPs, workplace pensions) — tax relief going in, taxed coming out, accessible from age 55 (rising to 57)
- ISAs — no tax on growth or withdrawals, but limited annual contributions
- General Investment Accounts — fully flexible, but subject to Capital Gains Tax and dividend tax
- Cash — instantly accessible, but earns less over time
- Property — can provide rental income or a lump sum if sold
The balance between these assets — and the order in which you draw from them — shapes your tax bill and how long your money lasts.
4. Tax
Tax is the system that determines how much of your income you actually keep. The UK tax system has multiple layers:
- Income tax — applied to pension income, employment income, rental income
- Capital Gains Tax — applied when you sell investments at a profit
- Dividend tax — applied to dividend income from shares and funds
- Tax-free allowances — the Personal Allowance, ISA wrapper, CGT annual exempt amount
Tax is not a separate concern — it interacts with everything else. The amount of tax you pay depends on your total income from all sources in a given year, which means the combination of your pension drawdown, State Pension, and investment income all affect each other.
5. Time
Time is the dimension that ties everything together. A retirement projection plays out over decades — often 25 to 35 years. Over that span:
- Inflation erodes the purchasing power of fixed income
- Investment growth compounds, potentially increasing your assets
- Spending patterns change as you move through different phases of retirement
- Tax thresholds shift (or don't, creating "fiscal drag" that pushes more income into higher bands)
The interplay of these forces over time is what makes retirement modelling valuable. A snapshot of today's finances tells you very little about whether your money will last. A year-by-year projection tells you much more.
How they connect
These five components don't operate in isolation. Each year of the projection:
- Income arrives from your various sources
- Tax is calculated on the combined total
- Spending is subtracted
- If there's a shortfall, money is withdrawn from your assets
- Remaining assets grow (or shrink) and carry forward to the next year
This cycle repeats for every year of the projection. The result is a trajectory — a picture of whether your wealth is growing, stable, or declining over time.
Understanding these building blocks makes it much easier to interpret your results and to think about which assumptions matter most for your situation.
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.