Bonus to Pension Conversion Calculator

A 10,000 bonus taken as cash at 42% combined tax leaves 5,800 in hand today. Routing the full 10,000 into a pension and growing it at 5% for 20 years produces a projected 26,533 before any drawdown tax. To compare like with like, the after-tax cash can be invested too: 5,800 growing at the same 5% for 20 years reaches about 15,389. The gap between the two, roughly 11,144 here, is the upfront tax that the pension route never paid, compounded over the term.

What the result means

The Pension Future Value is the gross bonus compounded at the return you enter. The Cash Route Future Value is the after-tax cash compounded at the same return. Pension Advantage is the difference between them, the extra retirement wealth from contributing pre-tax money rather than post-tax money into the same investment. Drawdown tax in retirement is applied separately and is not netted here.

Quick example

With a gross bonus of 10,000, a combined marginal rate of 42%, an expected annual return of 5%, and 20 years to retirement, the pension route projects to 26,532.98, the cash route to about 15,389, and the Pension Advantage to about 11,144. Change any figure and the output shifts — seeing the pattern is often more useful than memorising the formula.

Which inputs matter most

You enter Gross Bonus, Combined Marginal Rate, Expected Annual Return, and Years to Retirement. Not every input carries equal weight — adjusting one at a time toward its extremes shows which ones move the result most. The return and the number of years drive the compounding; the marginal rate sets how much upfront tax the pension route avoids.

What's happening under the hood

Pension Future Value is the gross bonus compounded at the supplied return for the years to retirement. The cash route first applies the marginal rate to the gross, then compounds the remainder at the same return. Both routes are valued at retirement so the comparison is like-for-like. The figures are nominal — not adjusted for inflation — and drawdown tax is excluded. The formula is listed in full below; if a number looks off, you can retrace it by hand.

What this model leaves out

Several real-world factors sit outside this calculation and can move the answer either way: tax charged when the pension is drawn in retirement, any payroll-tax saving an employer chooses to pass on, limits on how much can be contributed tax-efficiently each year, investment fees, the order in which returns actually arrive (sequence of returns), and inflation — the output is a nominal figure, so its spending power at retirement will be lower than the headline suggests. Rules for pensions and their tax treatment vary widely by country and change over time.