Nominal versus real returns
In brief: The growth rate you assume in your projection has a major impact on the outcome. FutureClear shows all projections in real terms (today's purchasing power), so a projected balance of £300,000 at age 80 means £300,000 of today's buying power.
Investment returns can be expressed in two ways:
Nominal returns are the headline figures — the actual percentage your investment grows. If a fund returns 6% in a year, that is its nominal return.
Real returns adjust for the effect of inflation. If the fund returned 6% but inflation was 2.5%, the real return — the increase in purchasing power — was approximately 3.5%.
Real returns express the change in purchasing power, which is a different measure from nominal returns. A pension pot that doubles in nominal terms over 20 years represents unchanged purchasing power if prices also double over the same period.
Why real returns matter for your retirement
Your income needs to keep pace with the cost of living. If your pension pot grows at 5% per year but your spending costs rise at 3% due to inflation, your effective real return is around 2%. That's the rate at which your pot is genuinely growing in terms of what it can buy.
This distinction affects how spending targets are interpreted in projections. FutureClear expresses all projections in real terms — spending amounts stay flat because they already represent today's purchasing power. A £30,000 annual spend at age 80 means the same buying power as £30,000 today.
How compound growth works
Compound growth means earning returns on previous returns — not just on the original amount. The effect is powerful over long periods.
For example, a £100,000 pot growing at 4% per year:
- After 10 years: approximately £148,000
- After 20 years: approximately £219,000
- After 30 years: approximately £324,000
The growth accelerates over time because each year's return is applied to a larger base. This is why starting to invest early — or leaving invested funds untouched — can significantly affect the eventual outcome.
The same compounding effect applies in reverse when fees reduce returns. A 1% annual fee applied to the same pot over 30 years reduces the final balance to approximately £242,000 rather than £324,000 — a difference of over £80,000.
Growth rate assumptions in projections
Any projection that extends decades into the future requires assumptions about future investment returns. These assumptions are inherently uncertain — actual market returns vary considerably year to year and over different periods.
A retirement projection typically uses a single investment growth rate assumption that applies to all investment assets (SIPP, ISA, GIA) unless per-asset rates are configured. The default assumption is illustrative — it is not a prediction of what markets will actually return.
Some people enter a lower growth rate (e.g. 1–2% real) to model a cautious scenario. Others use a higher rate (e.g. 3–5% real) as a central case. Running multiple scenarios with different rates shows the range of possible outcomes.
Historical long-run equity returns (after inflation) in developed markets have typically been in the range of 4–6% real, but this historical pattern does not guarantee similar future returns.
How growth is applied in projections
Growth is applied at the end of each simulated year, after spending, withdrawals, and other transactions. This is a conservative timing convention — applying growth to the post-withdrawal balance rather than the opening balance.
The net return used for each asset is:
net return = gross growth rate - annual fee (%)
For GIA assets, dividend income is handled separately: a dividend yield is calculated on the opening balance and added to the post-growth balance, with dividend tax applied in the same year.
The growth rate entered is a real rate (after inflation). All projected balances therefore represent today's purchasing power. You do not need to mentally discount for inflation — the projection has already done this for you.
How FutureClear handles nominal rates from pension providers
Pension providers often quote escalation rates in nominal terms — for example, "your DB pension increases by 3% per year." FutureClear converts these nominal rates into real terms using your inflation assumption. With 2.5% assumed inflation, a 3% nominal escalation becomes 0.5% real growth per year.
Income sources linked to CPI or RPI (such as the State Pension) maintain their purchasing power by definition. In real terms, these appear as a flat line — the same amount every year. This is correct: a CPI-linked income is designed to keep pace with prices.
Conversely, a level (non-escalating) income like a fixed annuity loses purchasing power over time. In FutureClear's real-terms view, this appears as a declining income — which accurately reflects the erosion of its buying power year by year.
These projections are for modelling purposes only. They do not constitute financial advice. Past investment performance is not a reliable indicator of future results. Please consult a qualified financial adviser before making financial decisions.