The simple answer; it’s an unnecessary risk which can be easily avoided.
For many, retirement is about certainty. Certainty of income, certainty that your income will always be enough to help you live the lifestyle you want.
What’s not certain is exchange rates and currency pairs, be that Sterling or the Euro to the Aussie dollar, or any combination of different currencies.
As you know, every currency is linked to a different economy (or multiple economies, in the case of the Euro), so that leads to fluctuations in value. One day your savings are worth 20 years of good living, the next they could be worth 10 – and that leaves a big hole.
It’s not as drastic an example as it seems, either.
If you’re rich enough in years to be thinking about retirement, you’ll also remember the End of the Eldorado dream: an altogether too-real-world example of a plunging GBP and associated property crash, leaving thousands of expat retirees in the mire between 2008 and 2010.
These unfortunate savers held the same dreams as you, and as many of us. Escape a life in Britain where crime was rising, the weather dull, and cost of living high. But, the weather was soon to become the only thing still sunny in Spain. From 2007-2009, GBP fell almost 33% against the Euro, and as the two currencies came close to parity at a one-to-one ratio in 2008, those surviving on UK pensions paid in GBP sterling saw their monthly income payments fall by hundreds of Euros.
Problems were compounded by the collapse of the Spanish property market too. So even if they wanted to sell their Spanish homes, there was a flood of supply and little demand for properties in British retirement hotspots throughout Spain while the global financial crisis took a grip on the world, with the EU heavily impacted.
The bottom line is, these currency shocks are not exactly black swan events. As the chart below highlights, the movements in exchange rates are frequently volatile and more normal than you might think. Sudden movements tend to create different behaviours, when peoples’ backs are to the wall.
GBP – EUR exchange rate: 1999-2021
Retiring in Australia with a UK pension
It can be natural to anchor a previous exchange rate and believe it’s better to wait for GBP-AUD to hit two-to-one (£1= $2). But again, looking in the rearview mirror in this situation will only hamper your ability to see what’s ahead of you, both present and future. The GBP-AUD currency pairing has a history of volatility, as detailed in the chart below:
GBP – AUD exchange rate: 2001-2021
If you moved to Australia in the early 2000’s when the rate was closer to three-to-one (£1= $3), then it’s understandable that you might be reluctant to exchange when the rate is less than two-to-one (£1= $1.8), and anchor for a rate in the rearview mirror.
Eliminating currency risk
Australian residents with UK pensions don’t need to risk holding retirement savings in GBP, whether they are transferring their UK pensions to Australian or not.
If you are under 55, you are not yet eligible to transfer your UK pension to Australia. However you don’t just need to accept currency risk, as there are UK pension solutions available for non-UK residents, that offer the flexibility to exchange GBP retirement savings, partially or wholly to Australian dollars and, invest UK pension savings in Australian dollar investment strategies.
This can be a way of controlling the exchange rate you achieve, well in advance of dedicing whether to transfer your UK pension to Australia, which is a whole different consideration, something you can read further about here.
Retirement savings are very susceptible to currency fluctuations
Forex movement is a fact of life. When we’re going on holiday, it’s a source of minor frustration that rates have fallen out of favour, but when you’re retired it’s a much bigger concern. Not only are we talking about much bigger sums of money, we’re talking about an unnecessary risk associated with your main source of income. You see, when you’re retired, you won’t be coming back off holiday and picking up the same wage again. You can’t look for another job with a bigger salary.
Yes, you may have other sources of income from investments such as stocks or property, but your investment portfolio is subject to its own risks too – your pension is there to mitigate that risk and be the stable source of income you need, while other assets might splutter and surge accordingly.
Why would you ever wait to convert your UK pension savings to the currency you’ll need in retirement?
We’ve already somewhat answered this.
People get hung up on the rate. They treat it as something you can ‘game’ like you do when going on holiday; time the transaction right and get a few more quid to play with for the same amount of money. Particularly, people get hung up on specific figure and rations – “I’ll trade when it hits 1.80,” or “I’ll wait until I can double my money.”
Chances are, the risk just isn’t worth it.
If you plan your retirement goals accordingly, you’ll know how much money you’ll need to achieve them. Any extra is unnecessary, especially when the risks of a crash can leave those goals feeling light years away.
And what about the Aussie dollar? What's the future looking like for expats seeking retirement in Australia?
As I said, GBP, EUR and AUD are influenced by completely different economies and factors.
Today’s rate for GBP-AUD stands around the 10-year average of 1.80. It’s a good deal. More importantly, it provides certainty and allows individuals to plan based on a known AUD retirement savings value.
That may not be the case in the future. As recently as February 2021, Philip Lowe, the governor of the RBA, spoke about trying to actually suppress the Aussie dollar with a AUS$100 bn bond issue. It had little impact. In March 2021 he stated:
“I would be more comfortable if it (A$) was lower still because we need to get the unemployment rate down, inflation back to target and a lower currency would help us get there.”
Dr Lowe told the Australian Financial Review Business Summit in answer to a question. However, he said the currency is not overvalued with commodity prices very high and interest rate differentials stable.
“So I understand why the currency is where it is. I would like it to be lower though, but we don’t have the tools to deliver that,” he said.
In fact, when you look at the Iron Ore boom driving the Australian economy and the reopening of the country’s lucrative foreign student market, it’s not hard to imagine that this rate may be gone sooner than you think.
If you’d like to discuss startegies to mitigate the risk of holding your UK pension in another currency, get in touch with Jason.
Jason O’Connell is an authorised representative (“AR”) of Shartru Wealth Management operating in Australia under AFSL: 422409.
Information on this website is general advice and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.