Currency Risk on Expat Savings: How Exchange Rates Affect You

If your savings, pension or plan are in one currency and your life is in another, every exchange rate move changes what you can spend. This guide explains where currency risk shows up in expat savings, how to match currencies to your spending and how to keep conversion costs down.

This guide is general information, not personal advice. Currency markets are unpredictable and nobody can forecast them reliably, so take advice before moving large sums.

The short answer

• Currency risk arises whenever the currency you earn or save in differs from the one you spend in.
• A weaker pound reduces what sterling income buys abroad, and a stronger pound increases it.
• The simplest defence is to match the currency of your savings to the currency of your future spending.
• Conversion costs can matter as much as the rate, so compare the all-in cost.

Where currency risk shows up

Experts for Expats describes the core issue: UK-linked income and assets are often paid in sterling, but daily spending happens in a local currency. For expats, that appears in several places.

• Pension and investment income paid in sterling and spent abroad.
• Savings held in sterling when you plan to buy a home or retire in another currency.
• Regular savings plans and bonds denominated in dollars, euros or sterling.
• Commitments in another currency, such as school fees or a mortgage.
• Returning to the UK, when foreign-currency wealth is converted back to sterling.

A worked example

This example uses invented exchange rates and is not a forecast.

A retiree receives £3,000 a month and lives in the eurozone. At a rate of €1.20 to the pound, the income converts to €3,600. If the pound falls to €1.10, the same £3,000 converts to €3,300. That is €300 a month less, a fall of about 8 per cent, with no change in the sterling amount. Over a year it is €3,600.

The move cuts both ways. If the pound had risen, the income would have bought more. The point is that the retiree cannot control the rate and has to plan for either outcome.

Match currencies to your spending

The principle is simple. Hold the money you will need in a given currency in that currency. Experts for Expats suggests aligning income with spending where possible to avoid frequent conversions, keeping buffers in both currencies and holding a mix that reflects where you spend and any plan to return to the UK.

A few ways to think about it:

• Short stay. If you will be abroad for a year or two and plan to return, there may be little reason to convert your savings at all.
• Medium stay. Consider holding a buffer in the local currency for living costs, and keeping the rest where it is.
• Long-term or permanent move. More of your assets may need to be in the currency you will spend, including your pension income in retirement.

This is a framework to discuss with an adviser. It does not tell you what to do, because tax, access and the cost of changing are all different from one case to the next.

The currency of a plan or bond

Most regular savings plans and offshore bonds are sold in sterling, US dollars or euros. If your plan is in a currency you do not spend, the exchange rate affects both what you pay in and what you get out. Before you sign, ask why the plan uses that currency and whether you can change it later. Our guide to five questions to ask before you sign a regular savings plan includes this point.

For bonds, see our guide to offshore bond tax for UK expats and our page on offshore investment bonds.

Keep conversion costs down

The rate is not the only cost. Banks often add a margin to the exchange rate and may charge transfer and receiving fees. Experts for Expats advises comparing the all-in rate rather than individual fees.

• Currency specialists often offer better rates than high-street banks for regular or large transfers, and may let you lock in a rate for future transfers.
• Multi-currency accounts let you hold and receive several currencies and choose when to convert.
• Forward contracts are a tool some brokers offer to fix a rate for a future date. They remove uncertainty but also remove the chance of a better rate, and they have terms to read.

Check that any provider is regulated for the service in the country where you live.

Fees, property and returning

Some of the biggest currency exposures are single big costs. School fees due in sterling while you earn in another currency are one example, and our guide to saving for school fees from abroad covers it. Buying property with sterling funds is another, because a move of 5 to 10 per cent in the rate can change what you can afford. Returning to the UK is the third: if your wealth is in a foreign currency, the rate on the day you convert determines what you bring home.

Pensions and currency

Pension income in retirement is where currency risk can last longest. A UK pension paid in sterling to someone spending in euros, dollars or another currency is exposed for as long as it is paid. If you are choosing where to hold a pension, ask whether the currency can be matched to where you will live. Our expat pensions hub explains the options.

Common mistakes

• Assuming a rate will go back to where it was.
• Holding everything in one currency while spending in another.
• Comparing the headline rate but not the margin and fees.
• Converting a large sum in one go without a plan.
• Not asking which currency a plan or bond uses.
• Trying to time the market instead of planning for either outcome.

Related reading

For the overview, see our expat savings hub.

Frequently asked questions

What is currency risk for expats?

It is the risk that exchange rate moves change the value of your income or savings in the currency you spend.

How can I reduce currency risk on my savings?

Match the currency of your savings to the currency of your future spending, and keep buffers in both currencies where that suits your plans.

Is it better to hold savings in sterling or the local currency?

It depends on where you will spend the money and for how long. Money you plan to spend locally may be better matched to the local currency, while money for a return to the UK may stay in sterling.

What is a forward contract?

A contract, offered by some brokers, that fixes an exchange rate for a future date. It removes uncertainty but also removes the chance of a better rate.

Do bank exchange rates include hidden costs?

Often yes. Banks may add a margin to the rate as well as charging fees, so compare the all-in cost of the transfer.

This article is for information only and is not financial advice. Exchange rates move and cannot be forecast. Take regulated advice before converting or moving large sums.