The average pension pot for British Expats living overseas is around 210,000 GBP, but currency fluctuations may cause losses of 20 per cent.
A recent analysis of the falling pound and its effect on British pensions paid in sterling on behalf of UK expats living overseas gives bad news for the estimated 247,000 British retirees living abroad.
Pensions held in sterling but drawn in foreign currency via cash or bank-to-bank transfers are permanently open to currency exchange fluctuation risks.
In the past, changes to the pound’s valuation against other currencies have lost pensioners at least 20 per cent during periods of volatility.
One historic example of how not monitoring sterling against the chosen country of retirement’s currency shows just how much spending power can be lost in a short time frame.
At the beginning of 2007, the pound was worth 1.48 EUR, but by January 2009 it had lost a third of its value to just 1.06 EUR.
If we take the example of a 2,000 GBP a month pension income, a retiree living in the Euro zone would have initially received 2,960 EUR per month, dropping to 2,120 EUR per month two years later.
Given that the exceptional nature of the fall was linked to the 2008 financial crisis, this is an illustration of the worst scenario but it’s also a warning that currency stability in the future is a long way from being guaranteed. Brexit’s uncertainty has caused some violent and rapid movements in the pound’s value against other currencies and this could easily continue for some time yet.
Those planning to retire overseas soon should begin hedging against the risk of currency fluctuation by designating either all or part of the pension amount in different currencies.
The best strategy is to decide on your preferred retirement destination and transfer your entire pension to the relevant currency.
Those still holding their pensions in sterling need to take a long hard look at the possible consequences to the pound of a no-deal Brexit crash out of the EU.