Question 1

What is compound interest?

Accepted Answer

Compound interest is interest calculated on both your initial deposit and the interest you've already earned. Unlike simple interest, which only accrues on your principal, compound interest means your money grows exponentially over time — often described as "interest on interest". The longer your money is invested, the more dramatic the compounding effect becomes.

Question 2

How is compound interest different from simple interest?

Accepted Answer

Simple interest is calculated only on your original investment. Compound interest is calculated on your principal plus any accumulated interest. Over long periods, the difference is dramatic: £10,000 at 7% simple interest for 30 years grows to £31,000, but with annual compounding it reaches £76,000 — more than twice as much.

Question 3

Does inflation matter when calculating compound interest?

Accepted Answer

Inflation gradually reduces the real purchasing power of money. If inflation runs at 2.5%, a pot of £100,000 in 10 years will only buy what £78,000 buys today. Use the "Adjust for inflation" toggle to see the real value of your future pot in today's pounds — it's the most honest way to plan for retirement or long-term goals.

Question 4

What is a good rate of return to use?

Accepted Answer

The S&P 500 has historically returned around 10% annually (roughly 7% after inflation). For UK-focused investors, the FTSE All-World has averaged 7–9% historically. A conservative estimate for long-term planning is 5–7% per year. Always account for platform fees (typically 0.15–0.45%) and inflation when setting your expectations.

Question 5

Is compound interest tax-free in the UK?

Accepted Answer

Interest and investment returns are generally taxable in the UK. However, using a Stocks & Shares ISA or Cash ISA shelters up to £20,000 per year (2024/25 allowance) completely from tax. Growth, dividends, and withdrawals inside an ISA are all tax-free, making ISAs the most powerful tool available to UK savers and investors.

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Compound Interest Calculator

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