Model lump sum and regular investments with compound growth. See nominal and inflation-adjusted real returns for ISA, pension and general investment accounts.
UK equity index funds: 7–9% historical nominal avg
Bank of England target: 2%. UK long-run avg: 2.5–3%
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Final value (nominal)
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Real value (inflation-adj.)
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Total invested
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Total growth
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CAGR
Investment split
ContributionsInvestment growth
Year
Value (nominal)
Total invested
Growth
Real value
Investment Returns: Nominal vs Real
A nominal return is the raw cash growth of your investment. A real return adjusts for inflation — it tells you how much your actual purchasing power has grown. For retirement planning, real returns matter most, because your spending in 20 or 30 years depends on what money can buy, not just how many pounds you hold.
Historic UK investment returns
UK equities (FTSE All-Share): ~7–8% nominal, ~5% real per year long-run
Global equities (MSCI World): ~9–10% nominal long-run (US-heavy)
UK government bonds (gilts): ~2–4% nominal depending on maturity
Cash (savings accounts): ~1–4% nominal (varies with Bank Rate)
UK residential property: ~5–7% nominal (including rental yield)
Tax wrappers — ISA vs Pension vs GIA
ISA: No tax on growth, dividends or withdrawals. Funded from after-tax income. £20,000 annual allowance. Access at any age. Best for medium-term goals and flexibility.
Pension: Contributions receive tax relief (20%/40%/45%). Employer contributions are free money. Growth is tax-free. 25% tax-free lump sum on withdrawal. Taxed as income beyond that. Accessible from age 57 (rising to 58 in 2028). Best for long-term retirement saving.
GIA (General Investment Account): No annual limit. Capital gains above £3,000 (2026/27) taxed at 18%/24% (basic/higher rate). Dividends above £500 taxed at 8.75%/33.75%. Least tax-efficient but most flexible.
The power of starting early
Investing £150/month from age 22 to 67 at 7% nominal gives approximately £540,000. Starting at 32 gives only £270,000 — half the outcome for 10 fewer years. Time in the market, not timing the market, is the most powerful factor for long-run wealth.
Worked Examples
David — Lump sum ISA, 20 years
Initial£10,000
Monthly contrib.£0
Return / Inflation8% / 2.5%
Final (nominal)£49,268
Real value£30,067
CAGR8.0%
Rachel — Regular saver, 25 years
Initial£5,000
Monthly contrib.£300
Return / Inflation6% / 2.5%
Total invested£95,000
Final (nominal)£230,223
Growth£135,223
Tom — Pension, 35 years
Monthly (effective)£150/mo
Return / Inflation7% / 2.5%
Total invested£63,000
Final (nominal)£270,158
Growth£207,158
Frequently Asked Questions
UK and global equity index funds have historically returned 7–10% nominal per year over long periods. After inflation (2–3%), real returns of 5–7% are a reasonable long-run planning assumption. A balanced portfolio (60/40 equities/bonds) might target 5–7% nominal. Past performance does not guarantee future results — avoid assuming recent high returns will continue indefinitely.
Nominal return is the raw cash growth — what your portfolio grows to in pounds. Real return adjusts for inflation and tells you how much purchasing power you have gained. With 8% nominal returns and 3% inflation, your real return is approximately 4.85% (1.08÷1.03−1). For retirement planning, real returns matter most since your future spending depends on what money buys, not just the nominal amount.
Both are excellent. A pension is usually better for long-term retirement saving because contributions receive tax relief (20–45%) upfront and employer contributions add free money. An ISA is better for flexibility — you can withdraw at any age without tax. Most financial planners recommend: (1) contribute enough to pension to get full employer match, (2) max ISA if possible, (3) top up pension beyond that for higher-rate taxpayers.
CAGR (Compound Annual Growth Rate) is the smoothed annual rate that would take an investment from its starting value to its final value over a given period. For example, a £10,000 investment growing to £49,268 in 20 years has a CAGR of 8%. It allows fair comparison across investments with different durations and is more useful than simple percentage gain (which ignores time).
Equity markets are volatile — values can fall 20–50% in a downturn (as in 2000–2002, 2008–2009, 2020). The key risk-management strategies are: (1) invest for the long term (5+ years) so short-term falls can recover; (2) diversify across geographies and sectors (a global index fund does this automatically); (3) keep an emergency cash fund so you do not need to sell investments during a downturn. This calculator shows projections at a steady rate — real returns will fluctuate significantly year to year.