ISAs v Pensions: The Official Retirement Debate

jamesd

It depends. The capital growth wouldn't really be called compounding but you'd work out the equivalent of compound interest rates to compare investments. Say [STRIKE]15%[/STRIKE]16% gain over two years would be equivalent to 7.7% a year compounded growth.

Accumulation units and income units where you set things up to reinvest automatically would have compound growth due to the reinvestment of dividends and interest in buying more units or increasing the value of the existing units.

stphnstevey

jamesd wrote: »

It depends. The capital growth wouldn't really be called compounding but you'd work out the equivalent of compound interest rates to compare investments. Say 15% gain over two years would be equivalent to 7.7% a year compounded growth.

Accumulation units and income units where you set things up to reinvest automatically would have compound growth due to the reinvestment of dividends and interest in buying more units or increasing the value of the existing units.

Thanks for this. So when people say there is about a 12% return on S&S compared to say 3% on cash in savings account, is this estimation including the compunding effect or not?

For instance, if you were trying to work out the return over 10 yrs for 10K in S&S at say 10% return per year, would you include compounding or is it simply 1K added each year?

Sorry to be pedantic, but it makes a huge difference over a long period of time

Paul_Herring

jamesd wrote: »

Say 15% gain over two years would be equivalent to 7.7% a year compounded growth.

Doesn't 7.7% over two years equate to closer to 16%? (1.077*1.077=1.1599)

jamesd

Paul_Herring, yes, it does, I've corrected the typo. Thanks!

jamesd

stphnstevey, it's calculated assuming compounding for the calculations. So 10% a year for ten years would leave you with £25,937, not £20,000.

Some structured products might not do it this way if they want to make the numbers more flattering but it's the way you can expect it to be done for any serious discussion.

stphnstevey

So would you say 15% was a good figure to use for the average return per year from a S&S investment? - I know this is a real guesstimate and returns can vary hugely, but as generally as it could be.

Aegis

stphnstevey wrote: »

So would you say 15% was a good figure to use for the average return per year from a S&S investment? - I know this is a real guesstimate and returns can vary hugely, but as generally as it could be.

I'd suggest not. 15% would be extremely good annualised returns. You'd need to have a very high tolerance to risk to achieve that sort of gain in the long term, and you'd therefore see a lot of volatility. Most people will probably have returns a fair bit below that in the long run.

stphnstevey

Aegis wrote: »

I'd suggest not. 15% would be extremely good annualised returns. You'd need to have a very high tolerance to risk to achieve that sort of gain in the long term, and you'd therefore see a lot of volatility. Most people will probably have returns a fair bit below that in the long run.

Thanks - Now, after looking on the internet, a figure of 10% is commonly used for this

jamesd

Expect 10-11% before fees, after inflation as a long term average on an equity-based mixture but plan on more like 6-7% after fees and inflation to give a safety margin. Or for balanced managed funds, plan on more like 4-6% after inflation and fees if you want to be quite cautious.

For my personal planning I use 6% for income but 9% after fees and inflation for growth when not trying to take income (9% total, not 9% + 6%). These aren't intended to be particularly cautious numbers and I add in safety margins around them. They also assume lots of non-UK investing.

For planning for variability have a look at the Pensions Commission First Report Appendix C: Rates of return before and after costs, tax and means-testing to see how the returns for given durations have varied in the past and allow some margin for possible lower future returns.

shazspice

Hi just need a bit of advice

Is it better for someone earning around £11,500 per year after tax to have a pension where the employer contributes the same % or save the money in an isa?

TIA