Extensive analysis conducted over twelve years by financial advisory consultancy; Hoxton Capital Management has found the average pension pot of over-65s living abroad has reached £210,000.
However, the company’s analysis has also identified that in volatile years, currency market fluctuations removed as much as 20% from British pensioners’ spending power. Based on the amount of British citizens aged 65 and over living in EU countries having reached 247,000 (ONS, 2017) – this 20% could represent a total of £10bn being wiped from British pension pots.
Hoxton warns that UK citizens who choose to retire to another country, but who leave their pensions in Sterling are potentially exposing themselves and their pensions to currency risk for the rest of their lives. The risk can be easily avoided by switching the pension into the currency of the country in which the citizen plans to spend their retirement.
This would ensure individuals could more effectively budget for the duration of their retirement. And, with around 247,000 British citizens aged 65 and over living in other EU countries, excluding Ireland*, the implications could be serious.
“In volatile years currency market fluctuations can remove as much as 20% of a pensioner’s spending power and, in extreme cases, end the dream of retiring in the sun. That’s why choosing the right currency for your pension is all part of sensible long-term financial planning,”
explains Chris Ball, Managing Partner at Hoxton Capital Management.
“For example, in January 2007, one pound was worth 1.48 Euros, a figure that had dropped to only €1.06 by January 2009. This means that on a £2,000 per month pension the client would have received €2,960 per month in 2007 and just €2,120 per month two years later. That’s a difference of €10,080 per year to an individual’s budget, which is a significant amount of money.”
“People planning to retire abroad can mitigate against the risks associated with currency fluctuations by thinking about when they are likely to retire and should hedge against currency risk by holding part or all of the pension in different currencies. In addition, individuals should regularly review their pension and retirement options to make sure they are still relevant, ideally, on a quarterly basis.
Retiring overseas exposes individuals to potentially volatile foreign exchange rate risks. However, by converting their full pension into the currency needed in retirement at the time of transfer to a SIPP (a self-invested personal pension) or a QROPS (a Qualifying Recognised Overseas Pension Scheme), the client can completely remove currency risk from their portfolio and plan effectively for their retirement whilst growing their pension in the clients’ ‘ultimate’ currency.
Retired expats who leave their pensions in the UK have no choice but to convert their Sterling-based pension income into the local currency, which results in them getting a different amount of local currency each time. This means they can end up with less money than they had bargained for, which makes it impossible to budget. Converting from one currency to another on a regular basis, adds Ball, is not an efficient way for an expatriate to manage retirement income.
One of the key benefits listed for doing a QROPS is ‘choice of currency’, continues Ball, yet most pensions are still left in Sterling, leaving those who do not intend to retire in the UK exposed to the volatile currency markets throughout their retirement. However, by working with Hoxton Capital Management Foreign Exchange (Bluestone), IFAs can take advantage of the currency benefits available when doing a SIPP or QROPS, protecting both their clients and themselves in the future.
Founded by UK qualified financial advisers, Hoxton Capital Management is a borderless, independent financial advisory consultancy that provides personal financial advice to expatriate clients living globally.