Investment return vs contributions: showing clients what really grew

Take an illustrative case. A client's pension has risen by £12,000 over the year. They are pleased, and the review says the value went up. What it does not say is that they paid in £20,000 during the year, so the investments actually lost money. The figure was accurate. The impression it left was not.

Separating investment return from contributions and withdrawals is the single most useful thing a review can do with the numbers. This guide sets out the calculation, works through a three-year illustration, lists the items that are easy to miscount and explains why percentages need more care than pounds.

Why investment return vs contributions matters

A change in value mixes two different things: the client's own money moving in and out, and what the investments did with it. Only the second tells the client how their investments performed, and only the second is a fair basis for judging the advice and the service.

The Consumer Duty makes this practical rather than academic. PRIN 2A.5.3R requires communications that "equip retail customers to make decisions that are effective, timely and properly informed" and that are "clear, fair and not misleading" (PRIN 2A.5). A review that lets a client mistake their own contributions for growth risks misleading them, even though every number is correct. Separating the two also supports price and value: a client cannot weigh what they paid against what they received if they cannot see what their investments earned.

The basic calculation

For any period, the investment return in pounds is:

Investment return = closing value, less opening value, less money paid in, plus money taken out.

Money taken out is added back because it left the portfolio during the period. If the client withdrew £10,000 and the value stayed the same, the investments must have earned that £10,000.

The return calculated this way is after any charges deducted from the portfolio, because those charges have already reduced the closing value. Say so in the review.

A worked illustration over three years

The figures below are an illustration only, for a fictional client with one portfolio. They are not based on any real client or product.

Read year by year, the illustration tells three different stories:

• Year 1. The value rose by £28,000, but £20,000 of that was the client's own money. The investments earned £8,000.
• Year 2. The value rose by £12,000, yet the investments lost £8,000. Without the split, the client would think it was a good year.
• Year 3. The value barely moved, rising by £1,000, but the client took out £12,000. The investments earned £13,000, the best year of the three.

Over the whole period, the value rose by £41,000, of which £13,000 was investment return. The yearly returns add up to the three-year figure, which is a useful check that nothing has been missed.

What counts as money paid in and taken out

Errors often come from sorting transactions into the wrong bucket.

Money paid in

• Regular and one-off contributions from the client.
• Employer contributions to a pension.
• Tax relief added to pension contributions.
• Transfers in from another provider.

Money taken out

• Regular income and one-off withdrawals.
• Tax-free cash and other lump sums.
• Transfers out to another provider.

Not money in or out

• Switches between funds. The money was already invested.
• Dividends and interest reinvested. These are part of the return.
• Moves between wrappers on the same platform. Not new money for the portfolio as a whole, although they are for an individual wrapper if you report wrappers separately.

Charges

Fund and platform charges reduce the value and so reduce the return. Adviser charges deserve a deliberate decision. If a platform shows them as a withdrawal and you treat them as money taken out, the return you show is before adviser charges. If you treat them as a cost, it is after them. Either can be reasonable if it is stated clearly and applied the same way every year, but the client should know which they are looking at. Our guide to explaining charges to clients covers showing each layer of cost in pounds.

Percentages, and presenting it to clients

Pounds are clear: the client can see exactly what their investments earned. Percentages need more care, because money arrives and leaves at different times.

A quick approach is to divide the return by the opening value. In the illustration, year 1 gives £8,000 divided by £150,000, about 5.3%. But that ignores the £20,000 paid in during the year, which was invested for only part of it. When large sums move, this shortcut can noticeably overstate or understate the result.

Platforms and fund reports use more precise methods, broadly of two kinds:

• Time-weighted returns measure how the investments performed regardless of when the client added or withdrew money. They suit comparing a portfolio with a benchmark or another fund.
• Money-weighted returns reflect the timing and size of the client's own payments, so they describe the client's actual experience more closely.

Neither is wrong. They answer different questions. If you show a percentage, say which kind it is and where it came from, and do not mix methods between years or between clients.

Presenting it to clients

• Lead with pounds, then add a percentage if it helps.
• Always show the four components together: opening value, money in, money out, closing value.
• Show the whole relationship as well as the latest year, so one bad or good year sits in context.
• Use plain sentences: "Your investments earned £13,000 over three years, after charges. The rest of the increase was money you paid in."
• Never let the change in value stand in for the return.

Doing it for every client

This calculation is simple for one portfolio and time-consuming for a whole book, especially when each client has several wrappers and providers. By our estimate, writing one annual review by hand takes about three hours, and sorting transactions is a large part of it.

Strata reads the platform valuation PDFs the firm already produces and separates genuine investment return from money paid in. It compares two or more periods across the whole span, not just the latest year, tracks charges year on year, and traces every figure to the report and page it came from, so the adviser can check each one quickly. By our estimate, the review then takes about twenty minutes. For how Strata fits into the wider review, see annual reviews written in twenty minutes.

Frequently asked questions

How do you calculate investment return separately from contributions?

Take the closing value, subtract the opening value, subtract money paid in and add back money taken out. The result is the return in pounds, after any charges taken from the portfolio.

Does pension tax relief count as a contribution?

Yes. It is money added to the pension, not growth, so it belongs with money paid in. Check it has been credited in the period you are reviewing.

Should we show time-weighted or money-weighted returns?

It depends on the question. Time-weighted suits comparison with a benchmark; money-weighted reflects the client's own experience. Whichever you show, say which it is and use it consistently.

See how Strata separates investment return from money paid in, or book a twenty-minute demo on Microsoft Teams with Adam Booth, run live on a demo firm with nothing to prepare.