Weak sterling and a squeeze on income will hurt many Brits living abroad. Kalpana Fitzpatrick highlights the ways to protect yourself
A place in the sun is something most people dream of as they approach retirement. But for many, the recent sharp fall in sterling, coupled with a global recession, mean their plans will be dampened.
Both expats and Brits with aspirations to move to warmer climates in Europe will have to rethink how to draw out their pension savings.
In January, sterling hit its lowest level against the US dollar in 23 years, slipping to $1.375, and the euro gained 23 per cent against the pound between January 2008 and January 2009.
However, this is only part of the picture. As interest rates fall and stock markets tumble, this puts a large squeeze on income. The state pension is also likely to remain static as the UK government instead spends its money on bailing out banks and trimming VAT.
British pensioners living abroad will have noticed that the value of their pensions have plummeted – many will have seen a drop of 20 per cent due to currency fluctuations. For those not wanting to give up their dreams and still take the expatriate route, careful planning will be essential if they are to make the most of their pension payments abroad.
The first thing to consider is whether to convert your pension into one offered by the country you’re moving to – often done by the Qualifying Recognised Overseas Pension Schemes route. This, according to the Pensions Advisory Service, is a simple procedure, processed just like a transfer to a UK scheme.
But Jeremy Silverstone, financial planner at the Fry Group, warns: ‘This is not for everyone. If you take your pension out of the UK now, you would be worse off because of the exchange rates.
‘However, it could suit someone who is looking to live overseas and has other sources of income and isn’t looking to crystallise their pension just yet. That way, they can withdraw their money when the currency rates improve.’
The next issue to address is currency. ‘Those going to Europe should consider hedging by splitting money between pounds and euros. They can then use whichever provides the best option when taking out money,’ advises Silverstone. ‘They can easily open a local account or a foreign currency account at their high street bank.’
Alternatively, you could hedge against further falls in sterling by taking out a forward contract – an agreement that allows you to fix an exchange rate in advance of the transaction. ‘The only problem is that you must have at least 10 per cent of the money available in advance and not many people do,’ argues Philip Hoey, account manager at foreign exchange firm Caxton FX.
For those where a forward contract is not possible, retirees may want to consider a limit order, which sets a specific target level at which to buy currency. Daniel Wray, senior currency broker at FC Exchange, explains:
‘It is a good tool in volatile markets and helps clients achieve a price without having to continuously watch the market, and avoids missed opportunities on days when the exchange rate goes up.
Unfortunately, not a lot of people use it because they often have a specific time in mind when they want to have the euros and a limit order needs time for the market to move.’
There are currently more than a million UK pensioners living abroad and, for many, the crisis will hit them hard.
Those with properties abroad are finding it harder to sell and come back into the UK and any further weakness in the economy could bring further gloom.
For those already in Europe there are some small changes that could be made to ensure you are getting the best deal where possible. Simple moves include not using ATMs that charge commission. According to foreign exchange firm HiFX, the average pensioner wastes £300 a year in unnecessary bank charges. Mark Bodega, marketing director at HiFX, says using a currency company could help avoid fees and customers could also fix the exchange rate for up to 12 months.
‘By using direct debit, pensioners can save up to £300 on transfer fees alone – high street banks charge around £25 for each transfer. In addition, customers will make further savings as they’ll also avoid bank charges, including commission – most banks charge up to 2 per cent of the transfer amount. Overseas bank receipt charges can cost up to another 0.5 per cent,’ Bodega says.
Until there is some light at the end of the tunnel, retirees should try and become wiser when remitting or postpone plans until better times return.