See whether your investment is truly growing your wealth in real terms. Enter any nominal return and inflation rate to see the real return, purchasing power change and what your money actually buys at maturity.
| Year | Nominal Value | Real Value | Inflation Cost | Real Gain |
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Nominal return is what your investment statement shows. Real return is what actually matters — the increase in what your money can buy. An 8% return in a 7% inflation environment grows your nominal balance but leaves your purchasing power barely changed. Understanding real return helps you set meaningful investment targets and choose the right wrappers to minimise the tax and inflation drag on your wealth.
Real Return = ((1 + Nominal Return) ÷ (1 + Inflation Rate)) − 1. At 8% nominal and 3% inflation: real return = (1.08/1.03) − 1 = 4.85% — not simply 8% − 3% = 5% (that is an approximation that holds for low rates). The difference matters when inflation is elevated. In 2022, UK inflation exceeded 11% — virtually all nominal investment returns were negative in real terms.
The real return difference between an ISA and a GIA is dramatic. At 8% nominal, 3% inflation, 20% tax: GIA real return = 4.85%. ISA (no tax): real return = 4.85%. For a higher-rate taxpayer paying 40% tax on income returns: GIA real return = 1.97%. ISA: still 4.85%. The ISA wrapper essentially doubles the real return for a 40% taxpayer.
Simply matching inflation means your purchasing power is preserved but not growing. UK equities have historically delivered 4–6% real returns over long periods. Cash in a savings account at 5% with 3% inflation: real return approximately 1.94%. Real wealth creation requires assets (equities, property) that earn meaningfully above inflation after tax over the long run.
Real return is your investment return after subtracting the effect of inflation. If your portfolio grows 7% but inflation is 3%, your real return is approximately 3.88% (using the Fisher equation, not simply 7-3=4%). Real return measures the actual increase in purchasing power — the ability to buy more goods and services. Nominal return is what your statement shows; real return is what genuinely makes you wealthier.
In 2026 with CPI inflation at approximately 3%, you need approximately 3% nominal return just to maintain purchasing power (break-even). For meaningful real growth of 3-5%, you need nominal returns of 6-8%. For a 20% taxpayer, the break-even nominal return is 3%/(1-0.20) = 3.75%. For a 40% taxpayer: 5.0%. Higher tax rates require higher nominal returns just to stand still.
An ISA eliminates the tax component of the drag on real returns. At 8% nominal return, 3% inflation: a 40% income taxpayer in a GIA earns approximately 1.97% real return. The same portfolio in an ISA earns approximately 4.85% real return — over twice as much. Over 20 years on £50,000, this difference compounds to over £70,000 extra wealth inside the ISA.