Brits spending their retirement in Europe have faced higher living costs than they would have paid in the UK, according to research by international payment specialist Equiniti.
Between May 2015 and May 2019, the buying power of the British pound reduced – meaning that something that cost £1 four years ago would now be around £1.07 – resulting in people paying around 7% more.
During that period, however, living costs in Europe went up by 14%, the research firm added.
“Sterling’s woes since 2015 means British expats, paid in pounds and spending in euros, have faced a tremendous spending squeeze over the past four years,” Sarah Coles, personal finance analyst at investment provider Hargreaves Lansdown, told International Adviser.
Andy Brown, director of payment services at Equiniti Global, said: “Expat pensioners are always at the mercy of the currency exchange rollercoaster, but after a period of considerable uncertainty they will be facing a significant increase in the cost of living.
“Our advice to anyone thinking about retiring abroad is to understand the implications of currency exchange rate movements and also look at the numerous ways in which to receive international payments as the ‘headline’ exchange rate is not necessarily an indication of the total cost of the transaction.”
To avoid Brexit woes, seek advice
Coles added that, although this could worry people looking to retire in Europe, it should not stop them from planning their move.
“In many expat destinations, price rises are coming from a relatively low base. Each year Mercer publishes its Cost of Living Index, and nowhere in the Eurozone comes higher on the list than London.
“Perhaps key is the fact that, in many countries and regions, property remains far more affordable than in the UK – even taking account of currency movements. In Spain – the most popular European destination for British retirees – average prices remain below their pre-crash peak.
“Unfortunately, we can’t know what will happen to exchange rates over the coming weeks and months. Ongoing Brexit negotiations means the exchange rate is likely to face more volatility in the immediate future, which will make it more difficult to plan.
“It makes it well worth protecting yourself from any further exchange rate fluctuations by using a currency specialist. This can be particularly helpful when buying a property or moving lump sums into euros, because not only could it be cheaper than using a bank, but it’s also possible to fix an exchange rate in advance or target a specific rate.
“For investors, it’s also a reminder of the value of investing in the jurisdiction in which you live, which removes exchange rate risk from the equation,” she added.
Use your pension wisely
Angela Lloyd Read, wealth adviser at Canaccord Genuity Wealth Management, told IA: “In terms of retiring to a foreign country, pensioners need to remember that their state pension will only increase each year if they live in: the EEA, Gibraltar, Switzerland or countries that have a social security agreement with the UK – but Canada and New Zealand are excluded.
“They will not get yearly increases if they live outside these countries, but their pension will go up to the current rate if they return to live in the UK.
“If they make a move to another country and they are in drawdown, then I would suggest that they keep a cash sum equivalent to a year’s income in their pension, in the currency of their new home, to provide some stability.
Sipps or Qrops?
“This may not be possible with some personal pensions but should be possible with a Sipp,” Lloyd Read added.
“Cash flow planning and research into the cost of living in the proposed home country is vital. If people have been living abroad and seen costs go up, they must not chase higher returns by taking more risk than they can afford”.
However, Coles told IA that Qrops could be a viable option as well, but pensioners need to beware of transfer costs.
“One option open to expats is to transfer their pension to a Qrops in the country where they are based. This will enable your private pensions to be paid in the local currency, and remove currency risk.
“However, this kind of transfer can be enormously expensive and involve significant fees, so for it to pay off, you would need a very sizeable pension indeed – one big enough to be knocking on the door of the lifetime allowance.”
