Protect Your Spending Power From Adverse Exchange Rates
High inflation is a threat to your standard of living because it reduces how much you can buy with your money. Another threat to expatriates’ spending power is the exchange rate – for example, over the last year the Sterling to Euro conversion rate dropped around 15%.
With the Bank of England cutting its base rate in April to stimulate the British economy and the European Central Bank increasing its rate in July to fight inflation, the divergence between the two currencies looked set to continue. If the two banks were to maintain these tactics the exchange rate could worsen for expatriates and those looking to change Sterling into Euros, for example to purchase a
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However exchange rates are hard to predict and with both Banks needing to fight the opposing threats of high inflation and low economic growth, future interest rate decisions are far from set in stone. The strength/weakness of the underlying economies will also affect the value of its currency.
If you intend to move to Spain you should look closely at your financial planning and, if necessary, restructure it to protect you not only against inflation but also the adverse effects of the exchange rate.
British retirees living in Spain tend to keep their savings in Sterling bank accounts and investments denominated in Sterling. They are highly likely to have Sterling denominated pensions. Some transfer an amount of money to a Euro account which can be a buffer against facing an exchange rate risk every time they wish to make a withdrawal. Others merely have regular amounts, such as pension income, sent to their Spanish banks, so every time a transfer is made it is affected by the exchange rate.
One way to overcome unfavourable rates is to use a
[Only Registered Users Can See Links. Click Here To Register]. They usually offer better rates than high street banks. You can transfer money on the prevailing “spot rate” or fix a rate for up to two years ahead. The latter option could work in your favour if the exchange rate falls below what it is at the time the arrangement is made. You could lose if the exchange rate improved, but a fixed rate gives you the security of knowing how much you receive each month and that your income will not fall over the period.
A long term solution is to match the currency of your assets to your liabilities. It makes sense that if you are spending in Euros you should hold enough assets in Euros to cover your spending needs. Even if you move to Spain and then return to the UK some years ahead, it is still wise to have around four or five years of your disposal assets in Euros as a safeguard to unfavourable exchange rate movements.
Of course, the exchange rate may well improve but there is no guarantee that it will, and if it does, it is unlikely to reach the favourable level it was when the Euro was first introduced. On the 1st January 2002, when Spain adopted the Euro, the exchange rate was 1.63. A year later it had dropped to 1.53 and the following January to 1.42. It then moved closer to 1.5 and was fairly steady for a few years until last September when it began to drop. By the summer of this year it had fallen to 1.26. The future of the exchange rate is still an unknown and in the long term could climb. In the short term, however, and at the time of writing, experts predict that it could fall even lower.
When you review your portfolio, look at your pension arrangements. If you have a personal or private pension you could switch to a Self Invested Personal Plan (SIPP) where you can choose what investments to hold and in which currency.
Another option for many pension funds is to transfer it into a Qualifying Recognised Overseas Pension Scheme (QROPS) which allows you to change currencies.
QROPS are very flexible and can be set up in Sterling or Euros and so eliminate the currency risk from your pension fund for good.
A financial adviser will explain what the best strategy is for your personal situation.
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Protect Your Spending Power From Adverse Exchange Rates 
