Pension Incomes in Europe – Are you prepared?

2 November, 2017

Matthew Crisp

Pension Incomes in Europe

For as long as I have been working in the foreign currency industry (11 years) I have dealt with thousands of individuals that have moved overseas to retire or to seek new opportunities, most of which have been retirees. The average age of an overseas home buyer is around 50 years old, but that age increases for those who are making their move a permanent one. This will entail almost certainly, the longest checklist of important tasks they have had to face since birth, but fortunately for most, the support that is now available from real estate agents, lawyers, currency companies and popular event shows and tv brands such as A Place in the Sun this is now more manageable than ever.

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But I think one thing that is less researched and considered than anything else for those who are considering a lifetime move overseas is the vulnerability of their income once they arrive.

Currently, pensions being paid direct into UK banks accounts for UK based pensioners are essentially, fixed income. Once your first pension amount has been received, you can almost certainly guarantee that next month, you’ll get precisely the same amount appear as a credit. Of course, inflation plays a key part in many cases once per year as a way of helping ensure that pension incomes remain as relevant to the price performance of the average basket of household goods, as possible. If the price of all goods increases by an average of 2%, it’s only fair that your pension increases with it. Many would consider this too little and over the past few years, the recession years, this hasn’t been so fruitful.

But what happens when you move overseas?

Once you arrive in your new country on day one of a new life, you probably need spending money already in your bank. You must eat, drink and possibly drive a car, so there’s an immediate need to have access to your funds. But as the days, weeks then months progress, you’ll soon get into the new routine of paying your new energy suppliers, the local council tax and insurances to name but a few. This for many won’t be new, there are as many monthly outgoings abroad, as there were at home and it won’t be too much of a problem for people, if any.

Where the substantial difference lies between receiving a UK pension in the UK or having it converted into euros, is its variable value over the year. No longer are we worrying about whether the government will be issuing an increase in our pension, but what the net result will be once it is transferred overseas.

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Essentially, your pension will for most, continue to be paid by the UK government in Pounds Sterling, into your UK bank account. Assuming for the benefit of this article that each year you achieve an increase of 2%, as a single individual, this equates to an extra £120 per year, or £240 for a couple. (These are approximate figures and where necessary figures have been rounded up for simplicity.) If we work this out monthly, you’re lucky to get the better end of £10 per month or £20 as a couple.

“Their joint pension over the past 12 months has changed in value by a whopping £1,440”

Now let us look at those who have been receiving their pensions over the past 12 months and have been converting it into euro’s, so it can be spent and used overseas. For this example, I am using a married couple who are both over the age of 70 and are currently receiving their state pensions, valued at £1000 a month in total.  Their joint pension over the past 12 months has changed in value by a whopping £1,440, or £120 a month. The numbers used here are based on the conversion of £1000 at the pounds highest and lowest points over the past 12 months. The highest point being December 2016 (1.19886) and the lowest in September this year (1.075.) Of course, not every month was at either end of that range and in fact fluctuated somewhere in the middle for around nine months of the that year.

By the rule of thumb, the exchange rate between the pound and the euro moves on average 10% a year. Some years have seen much higher and likewise, much less, but for budgeting purposes, 10% is a good starting point. Even though your state pension is likely to never fall below that of your most recent payment, your new chosen country may have different ideas as you’re forced to convert that relatively stable income, leaving you in a much more vulnerable situation than you’ve ever been used to.

When speaking with clients who are now faced with the reality that their income is now open to such wild swings, tied up close and personal to the relationship between the pound and the euro, I always make sure they are well prepared for a worst-case scenario. “What affect would a drop of 10% in your income have on you once you’ve moved?”  “Are these pensions your sole income?” “Do you have any other funds to fall back on in the event of a bad few months?”

This is the biggest reality check for many people now putting into perspective the impact of the currency markets and their regular income. Most expats moving following their retirement do not plan to work overseas, have no desire to return home nor wish for any help from friends of family. Why should they, they’ve managed to get this far without it, why worry now? Well of course it would seem that way, but calculating the eventuality of a bad few months exchange rates, it’s certainly worth asking yourself what that impact would in deed have.

The fact the pound is now sitting comfortably above its lowest point above the euro (1.018 – Dec 2008) by a tidy 13% is certainly comforting for those who have had to endure the toughest of times whilst their pensions yielded the lowest possible number of euros in history. In fact, I could bring up many examples of Brits returning home because of this dark time, but for many others it was a test as to whether they would be able to live out their lives without the need to pack up and return home. Simply put, “If we can afford to live our lives comfortably and maintain a respectable standard of living whilst our income yields as many euros as we have pounds, then as long as we don’t see a further depreciation in our income we’ll be able to service no matter what.”

Absolutely! If you can afford to live on the lowest of incomes, you certainly be able to do so at much higher levels!

But what should those considering a permanent move in the near future consider, and what are the factors at play, when calculating your potential income for the next 20 years or more?

What I would recommend doing is slashing your UK income by 10%, then working out its relevant value in your new currency. Could you service if your income dropped by 10%? Does that many euros give you enough to live on and will you get the lifestyle you desire? You could go one step further and calculate the effects of a 20% drop, because over the next 20 years, who knows what’s going to happen.

“What are the implications of being rated out by a week pound, or a strong euro?”

When taking a mortgage now in the UK, mortgage lenders must, by law, check affordability based on a potential increase in the bank of England’s base rate, to be certain that the repayment could still be met in a worst-case scenario. This is no different to checking your ability to live comfortably when moving overseas. What would happen if you could no longer afford to do so? What are the implications of being rated out by a week pound, or a strong euro? It’s worth checking this as for some it’s become an unfortunate reality of moving to a new country. If you’re on the bread line now, it may be necessary to consider employment or to potentially reduce your budget for the property purchase, as a need for a slush fund would, in your case, be paramount.

For the fortunate individuals who do have savings to fall back on, it’s worth checking how much that may need to be utilised in the event of a drop in your regular income. Could you go an entire year of dipping in and out of your savings? Would taking an unexpected €500 a month feed from your back up funds for an entire year leave you short?

Fortunately, there are ways to avoid this. Currency Index, our chosen money transfer specialist and also A Place in The Suns official currency partner, are trusted to deal with thousands of ex-pats pensions each month, by converting their Sterling into euros at the best possible exchange rate. Doing this every month helps stretch people’s incomes much further than they are currently able to through their regular high street banks and in some cases, negating the lack of increases issued by the UK government once per year.

But what about the wild swings in the exchange rate?

That’s something else they help hundreds more each month overcome by fixing the exchange on all 12 months payments at the start of the year. Instead of agreeing the rate once per month, leaving it down to chance as to what their net income will be in euros, they agree that very same exchange rate for the entire year. They do this by buying a year’s worth of euros upfront, without the need for its clients to make all 12 Sterling payments at the beginning. All they require is that one month’s payment is kept back as security, whilst the remaining 11 payments are collected and paid over on a set day. In month twelve, the client pays nothing, but they get their final (security) payment back and sent to their overseas bank accounts. This is an excellent way for those looking to budget month by month and for those who wish to know what their financial situation is going to be for a much longer period. This is something that is not guaranteed of course when taking a chance on the market by agreeing the prevailing exchange rate at regular intervals over the year.

This is also a service often taken advantage of by overseas mortgage payers who like the idea that not only having their Europe payment fixed for an agreed period but also the related cost in Pounds. Why take a fixed mortgage payment in euros when the cost in Sterling could vary by as much as 10 or even 15% in any given year?

Do you have concerns, or would you like to discuss this matter with an expert? Contact Currency Index now to have a free an impartial conversation.