How Important is Having Your Pension in the Right Currency?

Currency pensions

How Important is Having Your Pension in the Right Currency?

It is all too common for British expats not to give a second though about what the best options are with their UK pension schemes, once they leave their homeland. I think the term is ‘out of sight, out of mind’. But just how important is it to make sure that you are drawing on your pension in the right currency? A lot of people aren’t even aware that it is an option to have your UK pension in any currency other than pound sterling. 

There are many reasons to review what pension you have in the UK and fully understand what options are available to you as an expat. We won’t go into all of them now but something I believe is vital to your eventual retirement is drawing down in your local currency. You wouldn’t gamble your pension fund on one individual stock, would you? So why would you take a gamble with your pension fund by not having it in more than one currency?

Fluctuations in currencies can have a massive impact on how much income you receive in retirement. Let’s look at a case study to illustrate this:

Luke and Ryan both left the UK at the same time, in July 2007, and both moved to America with their families. They both had a final salary scheme in the UK that promised them an income of £2,000 per month in retirement. Luke decided to speak to an advisor to find out if there was anything he could do with this pension as he didn’t plan to ever return to the UK. Ryan did what most people would do and forgot about it until he retired. Fast forward to today and both Luke and Ryan are ready to draw down from their UK Pension. Having listening to the advice that was offered after leaving the UK, Luke decided to transfer his pension to an international SIPP and have it based in US Dollars, as he knew he wanted to retire in the States. Ryan decided to leave his pension in the UK with his current provider, so it is still based in British Pounds. 

In June 2019, having reached retirement age, they both received their first monthly income from their pensions in the UK. Luke received $4,060 and Ryan received $2,500. Luke has received a massive 62% more than Ryan has. Why was there such a difference? The reason for this is that Luke decided to move his pension to his retirement currency as soon as he left the UK, therefore he locked in his exchange rate in July 2007, which was $2.03 to the pound. Having left it in the UK and not considered his options, Luke is now getting just $1.25 for every pound, therefore he is worse off by a massive $18,072 per year, and that could get worse. 

We don’t know what is going to happen to the pound over the coming years and months, so we can’t say that now or later is a good time to make the transfer into your retirement currency. But I’m sure you’d sleep a lot better knowing exactly what your income is going to be in retirement than having to worry about what is happening to the pound back home and possibly seeing your income reduce every month. For that reason, amongst others, it is so important to fully understand what options are available to you with your UK Pension Schemes. 

George Stainton is a Senior Wealth Manager at Hoxton Capital Management. Get in touch today for a free comprehensive review of your UK pension assets.

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