Forex poses a genuine risk to expatriates though not in the way you may expect. According to the latest Office of National Statistics (ONS) figures over 3.5 million people have emigrated from the UK over the last 10 years. The vast majority of whom hold pensions that may now bear a greater risk to their retirement dreams than they are aware of. There are, however, a few simple tricks that can be used to either offset or nullify this risk. To this end allow us to answer some frequently asked questions (FAQs) on the matter;

Forex is a common abbreviation for foreign exchange (also known as fx). It is the term to describe the transaction from one country’s currency to another. There is constant market availability (open 24 hours) due to trading moving between four major exchanges: New York, London, Tokyo & Sydney
Any pension held in a different currency to that of your retirement destination. Therefore, this includes all UK pensions for anyone who intends to retire outside Britain. By contrast, although there are other reasons for British expats who intend to retire in the United Kingdom to move their pension abroad this is not one of them
It could easily result in a 25% reduction in your pension, potentially more. Due to people’s timescales for pension investments this greatly increases the risk due to small moves turning into much larger long term changes.
 
Euro depreciation against the dollar. Falling from 1.3606 to 1.1352 (High 1.3692, low 1.0496)
 
For example, the euro has depreciated almost 17% against the US dollar over the last year and almost 25% from the market top to bottom
One option is to move your underlying investment holdings into the currency denomination of your retirement destination. This way, your pension portfolio can be protected against any volatility in exchange rates.
 
The most important aspect to reduce forex risk is to alter your financial plans accordingly to account for it. Ideally, your choice of currency should be aligned with your objectives. Therefore, if you intend on retiring in Spain you should calculate your retirement goal in euros. This may then have a baring as to how you invest.
 
Finally, if you are comfortable with taking some risk it is also possible to secure some of the best forex rates possible
There are a multitude of investments that are denominated in one currency but where their real value is derived from the underlying investment in a completely different currency. Therefore, unless it is hedged, the performance is affected by both the investment itself and the currency strength. As an example consider the shares of 50 major companies across Europe (known as the Euro Stoxx 50). Over the last year the performance has been as follows…
 
Euro stoxx 50
It has risen 5.2% from 3,284.81 to 3,455.80.
 
However, if someone invested in an unhedged USD share class the index would be priced in dollars. With the euro weakening 17% over the same period (see chart in how big a risk is forex to your pension) then the investment would have lost over 11%. By contrast, a hedged version would has returned an increase of 5.2% (excluding costs)
Hedging is normally employed to minimise risk. There are many different strategies but all aim at reducing known variables and, by association, risk. For example, if a gold miner is profitable at current prices of gold ($1,200 per ounce) they may hedge their position by pre-selling the next year’s worth of production at this price. The hedge ensures that the company is profitable for the next year irrespective of whether the price goes up or down.
 
There are downsides though including both the cost of hedging and the loss of any potential gains. These, however, should be seen as the price for gaining more certainty. Also, removing some variables can have the opposite effect and increase risk. If you are investing in the stock market then, all else being equal, they perform better with a weaker currency over a stronger currency (exports become better value etc). As such, you can find that in falling markets losses can be offset by a stronger currency and vice versa. This can reduce the volatility i.e. risk involved.
 
Whether you use hedging will be down to the level of risk that you are comfortable taking. Those with a lower risk tolerance should generally use hedging, if required, on investments that pay fixed levels of interest. Other types of investments can benefit from not being hedged as mentioned earlier. The exact strategy will depend on the investments held. For any queries you should seek specialist advice as it should be tailored to your requirements
Forex rates can vary within ranges for the main developed world currencies (US dollar, Euro, British pound etc) due to large amount of trade that goes on between them. Over time the major currencies have moved between being weak and strong in this respect. This is most prominent between the UK and US. The forex rate between these two countries has ranged between 1.4 to 2 dollars to the pound over the last 30 years as demonstrated below.
 
Long term - 30 year - chart of US dollar vs the British pound
 
Therefore, getting the best forex rate when converting British Pounds (GBP) to US Dollars (USD) involves selling GBP near a rate of 2 and buying when the rate is close to 1.4. Doing this should boost your pension returns but comes with a risk. The risk is that either the rate never materialises, the rate continues to get worse, or that you do not invest in an asset because the currency it is denominated in isn’t near it’s best rate. In the above example, there is nothing to say the dollar doesn’t get a lot stronger, for example reaching parity with the pound, or vice versa. Regarding investment choice, the exchange rate won’t normally make or break the decision on whether to invest or not
In general, foreign exchange poses an additional risk to your pension due to the short term volatility associated with it. This can be mitigated by planning and investing in the currency that you will ultimately require based on your financial objectives. Your investments should account for this risk especially concerning the less volatile versions or when you are nearing your objective

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Forex – the hidden risk to your overseas pension written by Liberty Wealth average rating 5/5 - 3 user ratings