Can some one please give me the official UK formula used by Unit Trusts to calculate the effect of charges?

Question

Their key features show the effect after no more than 10 years. None of them shows mere. Why? Are they all in cahoots? I want to calculate it at up to 40 years.

Using ISAs for pension is far better than using private pension schemes with annuities in the end.
I have figured out a good formula, but the answers are a little out and I am a perfectionist. Any way, there is nothing like the official formula.

Steve B. Thank you for your explanation. It is certainly one way of doing things, but very elementary and I do not think fund managers go to all all that trouble every time they change their charges.There are mathematical formulas for getting the answers in seconds, over any time period.
I would even dispute Exel's answer that 6% per year is 0.5% per month, because 0.5% pm compounded over 12 m becomes 6.17%. That is why I am looking for the official formula advised by FSA. Rgds

Answer 1

You don't need to worry about clever calculations of annual percentage rates of return if all you want to do is compare two different ways of investing.

Below assume you are a normal rate taxpayer (i.e. you do not pay tax at 40%).

Excel can be used to run the calculations - I will explain for 1 year and you can then extend this to any number of years ...

Lets say you invest £100 per month. Lets assume BOTH methods return 6% a year = 0.5% per month. Lets assume 0 charges in ISA and £50 per year (taken in quarterly instalments, i.e. £12.5 every 3 months) for the Private Pension (SIPP).

ISA.
At end of month 1 you have £100.
At end of month 2 you have previous month total (£100) TIMES 1.005 = £100.50p PLUS this months contribution of £100 = £200.50p
At end of month 3 you have previous month total (£200.50) TIMES 1.005 = £201.5025p PLUS this months contribution of £100 = £301.5025p

This continues for the entire year.

SIPP
At end of month 1 you have £100 PLUS Tax rebate of 22% = £128.20.
At end of month 2 you have previous month total (£128.20) TIMES 1.005 = £128.846 PLUS this months contribution of £100 PLUS Tax rebate = £257.046.

At end of month 3 you have previous month total (£257.046.) TIMES 1.005 = £258.33 PLUS this months contribution of £100 PLUS Tax rebate £28.20 MINUS charges of £12.50 = £374.03

Again, this continues as long as you like.

Plainly the SIPP will grow much faster that the ISA because of the Tax relief. HOWEVER when you come to retire, you can only take 25% Tax Free Lump sum from the SIPP - and the remaining Pension will be taxed, whilst the ISA payments will all be Tax free (assuming the Government don't change their mind).

Even so, the longer you leave the ISA/SIPP to run the more the effect of the Interest paid on the Tax rebate will have.

Answer 2

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