Expat Financial Advice: How do I manage currency risk?
TL;DR
Currency risk can affect British expats when their income, pensions, investments and future spending are in different currencies. The currency in which an investment is priced does not necessarily represent its underlying currency exposure, so it is important to consider where your money is invested as well as the currencies you expect to spend in. Short-term financial needs may require a different approach from long-term investments. Managing currency risk is not about trying to predict exchange rates; it is about aligning your finances with your future spending needs and reducing the risk that currency movements disrupt your plans.Could Currency Movements Affect Your Retirement Plans?
For British expats, currency risk can become an important part of financial planning when your income, pensions, investments and future spending are spread across different currencies.
You might earn your salary overseas, hold UK pensions in sterling, invest globally and eventually plan to retire in a country where your everyday expenses will be in euros, pounds or another currency. Changes in exchange rates can therefore affect the real value of the money available to fund your future lifestyle.
Managing this risk is not about trying to predict which currencies will rise or fall. It starts with understanding which currencies your future financial goals depend on and how your existing pensions, investments and savings relate to those future needs.
I can help you review your wider financial position and consider how your pensions, investments, retirement destination, future spending and currency exposure fit together as part of a coordinated financial plan.
When we live back in our home country, managing currencies is all pretty straightforward.
We are paid in our home currency, we pay our bills in our home currency, and most of our investments are likely in our home currency.
In this case, we generally have very little currency risk.
The problem we have as expats, however, is that we have too many choices.
There is our home currency, the currency where we live and work, and then there is the currency of our future expenses, such as retirement, a holiday home, or our children’s university education.
Fortunately, managing our currency risk doesn’t require exotic currency hedging tools.
By following a few simple principles, you can eliminate much of the currency risk from your finances and avoid torpedoing your financial plans.
6 tips for managing expat currency risk
1. Identify the currencies of your future financial goals. Start by considering the currencies in which you are likely to need money in the future. This might include everyday retirement spending, buying a property, paying for education or supporting family members.
For British expats, there may not be a single base currency. You might have retirement expenditure in euros, retain financial commitments in pounds and have other expenses in the currency of the country where you currently live. Identifying these future liabilities is the starting point for understanding your currency risk.
2. Match your currency exposure to your future spending. Think about the currencies in which you are likely to spend your money in the future, rather than simply the currency in which your investments are priced.
For example, if you plan to retire in a Eurozone country, a significant proportion of your future living costs is likely to be in euros. Your financial plan should therefore consider how the assets intended to fund those expenses are exposed to different currencies, particularly as you approach retirement.
However, this does not necessarily mean that all of your pensions and investments should simply be denominated in euros. The currency in which an investment fund is priced or reported is not necessarily the same as the currency exposure of the underlying investments.
A global equity fund priced in pounds, for example, may invest in companies around the world whose revenues, costs and assets are spread across US dollars, euros, yen and many other currencies. An equivalent fund priced in euros could potentially hold exactly the same underlying investments.
The important question is therefore not simply “What currency is my investment priced in?” but “What currencies will I eventually need this money to fund?”
Matching your financial strategy to your expected future spending can help reduce the risk that an adverse exchange-rate movement significantly affects your ability to meet an important financial goal.
3. Understand your real currency exposure. Currency exposure can be more complicated than the currency shown on your pension or investment statement. To understand the risk properly, consider where the underlying investments are located, the currencies in which companies earn their revenues and incur their costs, and the currencies in which you expect eventually to spend the money.
For example, a British expat might receive a salary in UAE dirhams, have a UK pension valued in pounds, hold investments in global companies and plan to retire in Spain with most everyday expenditure in euros. Looking only at the currency displayed on each account would not provide a complete picture of their currency risk.
It can therefore be useful to think about currency exposure at several different levels: the currency of your income, the currencies underlying your investments, the currency of your pensions and other assets, and the currencies of your future financial commitments.
For expats, the objective is to understand how these different currency exposures interact. Once you have a clearer picture, you can consider whether your pensions, investments, cash and other assets are appropriately positioned for the financial goals they are intended to fund.
4. Consider currency risk carefully within fixed-income investments. Currency movements can have a significant effect on the returns of bonds and other fixed-income investments held in a currency different from the one in which you expect to spend the money.
This can be particularly important where fixed-income assets are intended to provide stability within a portfolio. Exchange-rate movements can introduce an additional source of volatility that may work against that objective.
For this reason, currency-hedged fixed-income investments may be worth considering in some circumstances. Whether hedging is appropriate will depend on factors including the purpose of the investment, your future spending currency, investment timeframe and wider portfolio.
5. Diversify your equity holdings. Global equities can expose an investor to many currencies because international companies earn revenues, incur costs, own assets and operate across multiple countries.
Exchange-rate movements can still affect the return you experience when overseas investments are measured in the currency in which you ultimately spend your money. However, currency exposure within a diversified global equity portfolio is more complex than simply looking at where a company is listed or the currency in which its shares are traded.
Rather than attempting to predict individual currency movements, consider currency exposure as part of your overall investment strategy. Diversification across companies, sectors, countries and currencies can help avoid concentrating too much of your long-term financial future in any single market or currency.
6. Minimise foreign-exchange costs. Currency risk is not the only consideration when moving money between countries. Exchange-rate spreads, transfer fees and receiving-bank charges can also reduce the amount that ultimately reaches you.
Before converting or transferring money, compare the total cost of the transaction rather than looking only at the advertised transfer fee. This should include the exchange rate being offered, any spread applied to the conversion and any additional charges at either end of the transfer.
Specialist international-transfer and multi-currency providers, such as Wise and Revolut, are among the options available, alongside banks and other foreign-exchange providers. Costs and exchange rates should be compared for the particular currencies and transaction involved.
How Currency Risk Affects British Expats
Currency risk can become particularly important for British expats because the currency in which you earn money today may be different from the currencies of your pensions, investments and future spending.
You might live and work in one country, retain pensions and other assets in the UK, invest internationally and eventually retire somewhere else entirely. This can leave different parts of your financial life exposed to movements between sterling and currencies such as the euro, US dollar or UAE dirham.
The important question is not simply whether sterling will rise or fall. It is which currencies your future financial goals depend on and how changes in exchange rates could affect your ability to fund them.
Receiving a UK Pension While Living Overseas
If you retire abroad but receive income from a UK pension, movements in exchange rates can affect how much that pension is worth in the currency you actually use for everyday spending.
For example, if your pension income is paid in pounds but most of your retirement expenses are in euros, a change in the GBP/EUR exchange rate can alter the spending power of that income. This can be particularly important where a UK pension is expected to fund a substantial proportion of your regular retirement expenditure.
Earning Overseas but Planning to Return to the UK
The opposite situation can arise for British expats who are currently working overseas but eventually expect to return to the UK.
You may earn, save and invest in another currency while many of your longer-term financial goals will ultimately be priced in pounds. These could include buying a UK property, funding your retirement or meeting other future expenses after returning home.
In this situation, concentrating entirely on your current spending currency can overlook the fact that some of your most important future liabilities may be in sterling.
Buying a Property in Another Currency
Currency movements can also matter when you are planning a significant purchase such as an overseas property.
If the property is priced in euros but the money you intend to use is held in pounds, the sterling cost of the property can change before the purchase takes place, even if the property’s euro price remains exactly the same.
The closer you get to a known financial commitment, the more important it can become to consider whether taking substantial currency risk with the money allocated to that goal remains appropriate.
Paying for Education in the UK or Overseas
Education costs can create another currency mismatch for internationally mobile families. You might earn in one currency while expecting to pay UK school or university costs in pounds, or education costs elsewhere in euros, US dollars or another currency.
Because the amount and approximate timing of these expenses may be known years in advance, they can be considered separately from longer-term investments where the eventual spending currency or timing may be less certain.
Retiring in a Different Country
Some British expats know that they will eventually retire abroad but not necessarily in the country where they currently live.
For example, someone working in Dubai might earn in UAE dirhams, retain UK pensions and investments connected to sterling, invest globally and ultimately plan to retire in Spain or Portugal where much of their everyday expenditure will be in euros.
That creates several different currency exposures within one financial plan. Focusing exclusively on the currency you earn today could therefore leave future retirement spending exposed to exchange-rate movements.
Retiring Across More Than One Country
There may not always be one obvious retirement currency. Some expats expect to divide their time between the UK and another country, retain properties in different jurisdictions or continue to have financial commitments in several currencies.
In these circumstances, trying to identify a single currency for your entire portfolio may not reflect how you will actually use your money.
A more useful approach is to map your major financial goals against the currencies in which those expenses are likely to arise. Your short-term cash requirements, property plans, retirement income, education costs and longer-term investments can then be considered as different parts of the same cross-border financial plan.
Currency planning for British expats is therefore less about trying to forecast the next movement in sterling, the euro or the dollar and more about making sure your pensions, investments and savings are appropriately aligned with the life you expect them to fund.
Currency Risk Example: Retiring From Dubai to Spain
Consider a British expat who is currently working in Dubai but plans to retire permanently in Spain. Their finances could involve several different currencies even though their long-term retirement lifestyle will eventually be funded mainly in euros.
The Starting Position
Imagine they currently:
- earn their salary in UAE dirhams (AED);
- have several UK pensions valued in pounds sterling (GBP);
- hold a globally diversified investment portfolio;
- keep some savings in sterling and dirhams; and
- plan to retire in Spain, where most of their everyday expenditure will be in euros (EUR).
Looking at each account individually might suggest that the person has a mixture of sterling, dirham and international investments. But this does not tell us whether those assets are appropriately aligned with the financial goals they will eventually need to fund.
Where Does the Currency Risk Come From?
Once the individual retires in Spain, expenses such as groceries, utilities, transport, insurance and other everyday living costs are likely to be predominantly in euros.
If a significant part of their retirement income or assets remains exposed to sterling, movements between sterling and the euro could affect how much spending power those assets provide in Spain.
For example, if sterling weakened against the euro, each pound converted into euros would buy fewer euros. The value of the UK pension may not have changed in pounds, but its value relative to the person’s euro-denominated living costs would have fallen.
Why Simply Switching Everything to Euros Is Not the Answer
The solution would not necessarily be to convert every pension and investment into something displaying a euro value.
As explained earlier, the currency in which an investment is priced is not necessarily the same as its underlying currency exposure. A global investment fund priced in pounds could hold companies operating across the United States, Europe, Japan and many other markets. A euro-priced version of the same fund might hold exactly the same underlying investments.
The planning question is therefore more sophisticated than choosing GBP or EUR on an investment statement.
The Time Horizon Matters
Suppose retirement is still 15 years away. The individual may have considerable flexibility over how their long-term investments are structured because the money will not be required for many years.
Now imagine retirement is only two years away and they expect to use part of their savings to purchase a home in Spain shortly after arriving.
That money has a much more clearly defined purpose, timeframe and currency. Continuing to expose all of the funds earmarked for the property purchase to significant movements between sterling and the euro could create a different level of risk from the assets intended to fund retirement over several decades.
The closer a known financial commitment becomes, the more important it can be to consider the currency in which that expenditure will arise.
Building the Currency Plan Around the Goal
Rather than attempting to predict whether sterling, the euro or another currency will strengthen, the financial-planning process can begin by identifying the purpose of each part of the individual’s wealth.
This could mean considering separately:
- cash required before leaving Dubai;
- money intended for a future Spanish property purchase;
- short-term expenditure immediately after retirement;
- UK pensions that may provide retirement income;
- long-term investments intended to fund retirement over several decades; and
- any continuing financial commitments in the UK or elsewhere.
Each of these goals can have a different timeframe and potentially a different currency requirement.
This is why managing currency risk as an expat is not primarily about forecasting exchange rates. It is about understanding where and when you expect to spend your money, identifying the currency risks that could affect those plans and structuring your wider financial strategy accordingly.
Do Your Pensions, Investments and Future Spending Use Different Currencies?
For British expats, currency risk rarely involves just one exchange rate. You may earn in one currency, hold UK pensions in sterling, invest globally and expect to spend your retirement income in another currency altogether.
The first step is to understand how these different exposures fit together. That means considering where you expect to live, which currencies your future expenses will be in, when you are likely to need the money and which pensions, investments or savings are intended to fund each goal.
This becomes particularly important as major financial commitments approach. Money intended for a property purchase in the next two years, for example, may need to be considered differently from investments intended to fund retirement over several decades.
I can help you review your UK pensions, overseas income, investments, retirement destination and future spending requirements as part of a coordinated cross-border financial plan.
Rather than trying to predict the next movement in sterling, the euro, dollar or another currency, the objective is to understand the currency risks within your finances and consider how they relate to the life you are planning.
Common Currency Risk Mistakes Expats Make
Currency risk can easily be overlooked when your income, pensions, investments and future spending are spread across different countries. For British expats, the objective is not to predict exchange rates but to understand where currency mismatches exist and whether they could affect important financial goals.
Here are some of the most common mistakes to consider.
1. Confusing Investment Currency With Currency Exposure
Seeing GBP, EUR or USD on an investment statement does not necessarily tell you where the underlying currency risk lies.
A global investment fund priced in pounds, for example, may own companies operating across numerous countries and generating revenues and costs in many different currencies. An equivalent share class priced in euros could potentially hold exactly the same underlying investments.
Look beyond the currency displayed on the account and consider the underlying investments and the financial goal the money is intended to fund.
2. Keeping Everything in Sterling Simply Because You Are British
Sterling may remain important if you have UK expenses, property or expect eventually to return to Britain. However, being British does not automatically mean that all of your future financial needs will be in pounds.
If you expect to retire permanently in Spain, for example, much of your everyday retirement expenditure is likely to be in euros. Holding assets overwhelmingly around sterling while having substantial future euro expenditure can create a currency mismatch.
The appropriate mix will depend on your individual circumstances, including where you expect to live and spend your money.
3. Planning Around Where You Live Now Instead of Where You Will Spend the Money
Expats often accumulate savings in the currency of the country where they currently work. That can make sense for current expenditure, but your long-term financial goals may be somewhere completely different.
A British expat working in Dubai, for example, might earn in UAE dirhams while planning to retire in the Eurozone or return to the UK.
Your current salary currency and your future spending currencies are not necessarily the same. Currency planning should therefore consider where each part of your wealth is ultimately expected to be used.
4. Ignoring Currency Risk in UK Pensions
UK pensions can remain an important part of an expat’s retirement plan even after they have moved overseas.
If pension benefits are received in sterling while your everyday expenditure is primarily in another currency, movements in exchange rates can affect the spending power of that income in your country of residence.
This does not necessarily mean that a UK pension needs to be moved or converted. It means that the currency of your pension benefits should be considered alongside your other retirement income, investments and expected expenditure.
5. Taking Unnecessary Currency Risk With Money Needed Soon
The appropriate approach to currency risk can change as a financial goal gets closer.
Money invested for retirement 15 or 20 years from now has a very different timeframe from money earmarked for a house purchase, university fees or another known expense next year.
If you know that a significant payment will shortly need to be made in a particular currency, a substantial adverse exchange-rate movement immediately before the payment could materially change its cost.
The timeframe, purpose and currency of a financial commitment should therefore be considered together.
6. Trying to Predict Exchange Rates
It can be tempting to delay a currency conversion because you believe sterling, the euro, dollar or another currency is about to move in your favour.
However, exchange rates respond to many factors, including interest rates, inflation expectations, economic data, political developments and changing market sentiment. Consistently predicting short-term currency movements is extremely difficult.
A financial plan should therefore not depend on correctly forecasting the next move in an exchange rate. The focus should instead be on managing the consequences if currencies move against you.
7. Looking Only at the Advertised Foreign-Exchange Fee
The visible transfer fee is not necessarily the full cost of exchanging money.
Foreign-exchange costs can include the exchange-rate spread, transaction fees, intermediary charges and receiving-bank fees. This can become particularly significant for expats making regular transfers or converting large sums for property purchases and other major expenses.
When comparing banks, international-transfer services and multi-currency providers, consider how much of the destination currency you will actually receive after all costs, rather than comparing the advertised transfer fee alone.
For British expats, managing currency risk is ultimately about connecting your money with your future plans. Understanding where your income and assets are exposed today, where you expect to spend money tomorrow and when those expenses are likely to arise can help you make more informed decisions without relying on predictions about future exchange rates.
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“I have consistently gone back to Ross to seek advice as my situation has changed and I have also talked about and recommended Ross to several expat colleagues.
Ross is a great sounding board and very comfortable providing advice to those already with some knowledge of investing and those who are just starting out.”
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More TestimonialsFrequently Asked Questions About Currency Risk for Expats
What is currency risk for expats?
Currency risk, also known as exchange-rate risk, is the possibility that movements between currencies will affect the value or spending power of your income, savings, pensions or investments. It can be particularly relevant for expats who earn in one currency, hold assets in another and expect to spend money in a different currency in the future.
Why should British expats be concerned about currency risk?
British expats can have several different currency exposures at the same time. You might earn an overseas salary, retain UK pensions in sterling, invest globally and eventually retire somewhere where most of your expenditure is in euros or another currency.
Exchange-rate movements can therefore affect the value of your income and assets relative to the expenses they are intended to fund.
How do I determine my base currency?
For an expat, there may not be one single base currency. A more useful starting point is to identify the currencies associated with your major financial goals.
For example, you might have everyday expenditure in your current country of residence, a future property purchase in euros, UK education costs in pounds and retirement expenses in another currency. Each goal can have its own timeframe and currency requirement.
Should I always match my investments to my future spending currency?
Not necessarily. The currency in which an investment is priced or reported is not necessarily the same as its underlying currency exposure.
A global equity fund priced in pounds, for example, may own companies generating revenues and incurring costs across many different currencies. A euro-priced version of the same fund could potentially hold exactly the same underlying investments.
The objective is to understand how your assets relate to the currencies and timeframes of the financial goals they are intended to fund, rather than simply changing the currency displayed on an investment account.
How does currency risk affect a UK pension if I live abroad?
If you receive pension income in pounds but spend most of your money in another currency, movements in the exchange rate can affect the local spending power of that income.
For example, a British expat living in Spain may receive pension income in sterling while paying most everyday expenses in euros. Changes in the GBP/EUR exchange rate can therefore affect how many euros that sterling income provides.
This does not automatically mean that a UK pension should be moved or converted. Its currency exposure should instead be considered alongside your other retirement income, investments and future expenditure.
Should expats hedge currency risk in fixed-income investments?
Currency hedging may be worth considering for some fixed-income investments, but it is not automatically appropriate in every situation.
Bonds and other fixed-income assets are often used to provide greater stability within a portfolio. Holding them in a currency different from the one in which the money will eventually be spent can introduce additional volatility through exchange-rate movements.
Whether hedging is appropriate will depend on factors including the purpose of the investment, your future spending currency, investment timeframe and wider portfolio.
Should global equities be currency hedged?
There is no single answer that applies to every investor. International companies can have complex currency exposures because their revenues, costs, assets and operations may span many different countries.
Currency movements can affect the returns experienced by an investor when overseas assets are measured in their spending currency, but the appropriate approach depends on the wider investment strategy, timeframe and financial objectives.
Currency exposure within global equities should therefore be considered as part of the overall portfolio rather than on the assumption that all foreign-currency exposure should either be hedged or left unhedged.
How does my investment timeframe affect currency risk?
The importance of a particular currency exposure can change as a financial goal gets closer.
Money intended for retirement in 15 or 20 years has a different timeframe from money required for a property purchase next year. If a known payment must shortly be made in a particular currency, an adverse exchange-rate movement immediately before that payment could materially affect its cost.
It can therefore be useful to consider the purpose, timeframe and spending currency of each major financial goal together.
What if I don’t know where I will retire?
If your future retirement country and spending currency are genuinely uncertain, concentrating too much of your wealth around one assumed future currency could create another risk.
A globally diversified approach can help maintain flexibility while your plans remain uncertain. As your retirement destination, timeframe and future expenditure become clearer, your currency strategy can then be reviewed in light of those decisions.
Can I hold several currencies as part of my financial plan?
Yes. British expats commonly have income, cash, pensions, investments, property and other assets connected to several currencies.
Holding more than one currency is not necessarily a problem. The important issue is whether those currency exposures make sense in relation to your current requirements and future financial goals.
How can expats reduce foreign-exchange conversion costs?
Compare the total cost of converting and transferring money rather than looking only at the advertised transfer fee.
This can include the exchange-rate spread, transfer fees, intermediary charges and receiving-bank fees. Banks, specialist international-transfer services and multi-currency providers may have different charging structures, so comparisons should be made for the particular currencies and transaction involved.
Should I speak to a financial adviser about currency risk?
If your pensions, investments, income and future expenditure involve several currencies, cross-border financial planning can help you understand how those exposures fit together.
A financial adviser experienced in working with British expats can consider currency risk alongside your UK pensions, investments, retirement destination, expected spending, investment timeframe and wider financial objectives rather than treating exchange rates as a standalone issue.
The Bottom Line
Managing currency risk as a British expat is not about trying to predict whether sterling, the euro, dollar or another currency will rise or fall. It is about understanding which currencies your future lifestyle and financial goals will depend on.
Your salary, UK pensions, investments, savings and future expenditure may all involve different currencies. The important question is whether those exposures make sense for where you expect to live, what you expect to spend your money on and when you are likely to need it.
Money required for a known expense in the near future may need to be considered differently from investments intended to fund retirement over several decades. Your approach can also evolve as your retirement destination and future spending requirements become clearer.
By considering currency risk as part of your wider financial plan, you can focus on aligning your money with your future goals rather than trying to forecast the next exchange-rate movement.
📚 Further reading
The danger of home-country bias and how to avoid it
Talk to an Expert
Currency risk can be an important part of financial planning for British expats. You may earn in one currency, hold UK pensions in sterling, invest globally and eventually spend your retirement income in another currency altogether.
I’m Ross Naylor, a UK-qualified Chartered Financial Planner and Pension Transfer Specialist with nearly 30 years’ experience helping British expats and internationally mobile families make sense of their pensions, investments and retirement plans.
My approach is based on holistic financial planning. Rather than looking at exchange rates or individual investments in isolation, I consider how your UK pensions, overseas income, investments, retirement destination, future spending and currency exposure fit together within your wider financial plan.
Currency planning is not about trying to predict whether sterling, the euro, dollar or another currency will rise or fall. It is about understanding which currencies your future lifestyle depends on, when you are likely to need the money and how currency movements could affect your financial goals.
I firmly believe your location in the world should never be a barrier to expert, impartial and transparent financial advice you can trust.
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