The Ups And Downs Of Sterling – Can You Avoid Them?

17.11.09

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Sterling has again been on a bit of a rollercoaster ride as the markets react to every bit of news on the UK economy. It?s anyone?s guess at the moment as to when we will see improvement ? or eve

Sterling has again been on a bit of a rollercoaster ride as the markets react to every bit of news on the UK economy. It?s anyone?s guess at the moment as to when we will see improvement ? or even stability ? in the Sterling to Euro exchange rate, and in the meantime British expatriates living in the Eurozone continue to suffer from fluctuating income unless they?ve taken steps to avoid exchange rate movements.

According to a report in The Telegraph on 4th November, retired British expatriates had lost around ?5.5 billion/?4.9 billion in the previous two years as a result of currency movements.

The figures were calculated by currency exchange specialists HiFX. Director Mark Bodega, said:

In the economic slowdown, everyone is feeling the pinch. However, Brits living in Europe and receiving a fixed income in Sterling are being hit particularly hard. In the past two years, we have seen unprecedented volatility in the currency markets with the value of Sterling fluctuating by over 30 per cent against the Euro.

According to HiFX, the average income for those on state pensions had fallen by around ?270 since January 2007.

Those with higher income from private pensions have obviously lost much more. A ?2,000 monthly income now provides ?760 less than it did in January 2007, while a ?3,000 income now converts to ?3,360 compared to ?4,500 in January 2007 – a monthly shortfall of ?1,140 for those who have left their pension funds in Sterling or who simply use the bank exchange rate each month.

If you can transfer your private pensions into a QROPS (Qualifying recognised Overseas Pension Scheme), you would have the option for your fund denominated in Euros and the income received in Euros, thus avoiding the falling exchange rates ? as well as currency conversion and transfer costs.

HiFX point out that many retirees waste an average ?300 by paying bank charges on the overseas transfer – charges that can be avoided. They calculate that each month the average retiree living abroad claims their pension through their bank and are charged between ?10 and ?30. Then many overseas banks levy average receiving charges of 0.4% of the total value of the monthly pension.

Using a foreign exchange company would allow you to fix an exchange rate for up to 12 months, and usually with no transfer, commission or receiving fees charged on top. If you had, for example, fixed a rate in mid June your pension or other income could now be converted to Euros at around ?1.18 as opposed to the current ?1.12.

Sterling has been put under selling pressure over recent weeks by a number of factors. Some are ongoing ? the size of UK?s public deficit; the size of its quantitative easing programme (expanded in August and again in November); the fact that the UK appears to be behind the Eurozone and US in exiting the economic downturn; suspicions that the Bank of England (BoE) has adopted a policy of ?benign neglect? on the weak pound to improve exports and therefore economic recovery, and of course the very low BoE interest rate.

Then the disappointing third quarter gross domestic product (GDP) figures were published which did nothing to help the Pound, and neither did Fitch?s warning that the record levels of government debt meant the UK was more at risk of losing its AAA credit rating than other major economies. These two factors caused analysts to ponder whether Sterling would head back to parity with the Euro.

The BoE quarterly Inflation Report released on 11th November was more dovish than expected ? but at the same time not positive for the Pound.

Governor Mervyn King refused to rule out an end to quantitative easing and said there was no limit to the programme ? just a few days earlier Sterling had rallied when the Bank increased quantitative easing by ?25 billion as opposed to the expected ?50 billion which the market had taken as a conclusion to the programme. The Report said that inflation would be below target in two years time which suggests that an interest rate rise is likely to come even later than expected. King also implied that a weaker pound will help to rebalance the economy towards exports, so it is unlikely that the Bank will attempt to improve Sterling?s strength.

Whether or not the Pound heads back to parity with the European currency remains an unknown factor, though various forecasts do expect it to do so in the next three to six months as the government debt expands and Britain?s financial sector remains weak. In the uncertain climate markets can overreact and we cannot rule out further weakening.

On the other hand, if the economy starts to grow next year and the government debt is sold into world markets, then we may see improvement. I?m afraid I cannot give an answer as to which way things will go and there are a wide range of forecasts – for example the exchange rate forecasts for the end of 2010 range from just ?0.86 up to ?1.30.

We can hope for the latter but I certainly wouldn?t bet on it. Instead take advice from a wealth management firm like Blevins Franks on whether you can change the denomination of your pension and investment funds and avoid future negative exchange rate movements. If not possible, perhaps you can put your savings to work to provide a higher level of income which would balance out the currency loss. At the same time ask about using a specialist foreign exchange service for regular Sterling to Euro transfers, so you can avoid the extra costs and (especially if the rate temporarily improves) fix a rate for the next 12 months to ensure you receive a fixed income for the period.

By Bill Blevins, Managing Director, Blevins Franks

17th November 2009

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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