August 2007

Counting the costs

Retiring abroad is a wonderful chance to build a new life. With English speaking property agents and advisers, retiring abroad has never been easier. For many people it is the realisation of a dream, and is often the result of years of thought and planning.

Yet many people do not plan or even realise the effect of currency fluctuations, and so take a significant risk with their finances when they retire abroad. Currency fluctuations can affect a house purchase, savings or pension payments, and every year many people lose money through lack of knowledge or good advice.

Allan Heggs, independent financial adviser at Silverside Financial Services, stresses the importance of clients knowing the implications currency fluctuations can have on their investments and life savings.

"Clients are better able to plan for their retirement, if they have an understanding of the options available to them when they are transferring their funds abroad", he says.

There are a number of currency exchange services that can help clients retiring abroad. Currency brokers can work with independent financial advisers to make clients aware of the options available to them. These may include...

1. Forward contracts - fixing the exchange rate for a future date

2. Setting up a regular transfer scheme - fixing the exchange rate for future transfers or taking the prevailing exchange rate

3. Using a rate watch service - being alerted to exchange rate movements

4. Hedging - transferring funds in a number of transactions over a period of time which can average out the exchange rate

The first mistake most expats make is assuming their bank is the best option for transferring large sums of money. However, most banks charge hefty transfer fees and offer poor exchange rates.

This can mean that on a one-off transfer of £100,000, a bank may cost up to £3,000 more than a specialist foreign exchange broker. This £3,000 comes at the expense of the client.

Banks also do not offer many currency services needed by expats, such as forward contracts, for example.

When buying a property abroad, although the price of the property may be known, the full cost is never realised until all the local currency has been bought. Volatile money markets can wreak havoc with overseas property purchasing plans - one move in the wrong direction and a dream property climbs out of reach as the price moves outside the client's budget.

This is where forward contracts come in - for individuals worried that the exchange rate is going to change before they complete on a property purchase. In layman's terms, a forward contract enables you to buy the currency now and pay for it later. It effectively guarantees the exchange rate for a future date, irrespective of exchange rate movements.

Tony Randle, a solicitor in the UK, bought a house in Spain in April 2007. He had never bought a property overseas before and had not appreciated the importance of managing exchange rate risk. He was alarmed when he realised that even a small move in the exchange rate would result in the cost of the property increasing by thousands of pounds. He needed to ensure that the exchange rate he achieved was as close as possible to the rate he had budgeted for. Tony also needed to deal with the risk that the exchange rate could move adversely in the time between him entering the contract to purchase the property and the date when the purchase would be completed.

Having contacted a currency specialist, Tony found that they could help with both of these problems. He used a rate-watch service, and was contacted when the exchange rate approached his target rate. By using a forward contract, Tony was also able to lock his future exchange rate some weeks before he would actually need to pay the purchase price.

Tony said "I was very glad of the rate-watch service. It enabled me to decide when the right time to fix my exchange rate had arrived. I was surprised at how easy and effective a forward exchange rate contract is to put in place."

More options

It's not only people investing abroad that can benefit from using a foreign exchange broker. Those wishing to retire abroad have a number of options available to them when it comes to deciding how to move their money. Their currency broker together with their financial adviser can help them decide the most appropriate course of action in order to manage any exchange rate risk.

Heggs continues, "clients expect their IFAs to have a good understanding of currency exchange issues".

Specialist currency exchange firms are geared towards these transactions and offer their clients a much more personalised service than the large banks. Rate-watch services mean that clients are continually updated with the changes in exchange rates, allowing them to exchange at a preferential rate.

Having some of these options at their disposal, people retiring abroad are able to manage their foreign exchange transfers and better the exchange rate risks.

CASE STUDY

Penny Reynolds emigrated to France two years ago. Before the big move Penny was faced with moving her money into Euros for a house purchase. She used a foreign exchange broker to help her transfer the deposit to hold the property and subsequently the balance.

By using a currency broker Penny was kept informed about exchange rate changes giving her the opportunity to decide the right time to transfer her funds.

"I found the service efficient, reliable and above all I knew exactly how many Euros I would get for my pounds."

Since leaving the UK Penny has continued to use a foreign exchange broker to transfer her pension to her French account quarterly. She is glad she found a service that would help her move her life savings to France and was pleased she didn't use her bank as "they charge a fortune for transfers to France."

Elisabeth Dobson
Foreign Exchange Consultant
World First