How Thai Baht/GBP currency volatility can make or break your UK Defined Benefit pension

Retiring in Thailand

Thailand remains an extremely popular destination for people moving from the United Kingdom. The stunning nature, friendly local communities and vibrant culture makes Thailand a top choice for those moving overseas.

Many Brits choose to move to Thailand towards the end of their career or at the start of their retirement. There are also many Thai residents who have worked in the UK at some point in their career are likely to have a UK pension scheme, which understandably will be invested in Pounds Sterling (GBP). For people who are intending on retiring in Thailand and drawing down from a UK pension scheme, there is considerable foreign exchange risk.

Defined benefit pension schemes pay a fixed ongoing monthly income in retirement. As a result, many people have no choice but to convert their GBP income into THB each month.

If we apply 2008, 2013 and 2020 GBP/BHT exchange rates to an ongoing pensionable income of £30,000, from a defined benefit scheme, the above currency movements will have had the following effect:

2008: GBP 30,000 = BHT 1,936,200

2013: GBP 30,000 = BHT 1,419,900

2020: GBP 30,000 = BHT 1,218,000

This calculation shows that converting from GBP to BHT on a regular basis can be an inefficient way to manage your retirement income, as your lifestyle and security will be at the mercy of currency fluctuations.

Moreover, the figures listed above are based upon a spot transfer rate without exchange fees included, bank to bank exchange fees will further reduce your BHT income.

The graphs below shows GBP/BHT and USD/BHT currency volatility over the last 12 months. The USD/BHT graph demonstrates a significantly lower amount of volatility against the GBP/BHT. For people drawing down from their pension, making a simple currency switch into USD can offer a great level of security, due to the stability of USD vs GBP.

GBP/BHT

USD/BHT

What are my options? You will need advice!

As highlighted above, keeping your money within your UK scheme in GBP poses a significant currency risk, as the amount you will receive each year will fluctuate in line with currency markets, making long term financial planning difficult.

A self-invested personal pension (SIPP) is one option which can reduce currency risk. A SIPP allows a member of a pension scheme to exchange their annual pension income for a one-off lump-sum. For example, instead of a £30,000 per year income, you may be offered a cash equivalent transfer value of around £750,000/$978,670 USD.

Once transferred, the pension can be invested allowing for the member to live off the investment growth. If the investment grew by a conservative amount of 4% per annum after charges this would provide the holder with a pension income of $39,146 per-annum without reducing the initial capital value.

By adding currency control to your UK Pension, not only will you reduce foreign exchange risk, but you also have the ability to lock in profit at the same time. These valuable additions to a UK Pension will be available to you via a specialised financial advisor.

Why now?

One of the main determinants of CETV’s are interest rates. Quite simply, lower interest rates are correlated with higher transfer values. This is because when interest rates are low it becomes more difficult for pension schemes to meet their obligations, as many schemes rely on gilt yields (linked closely to interest rates) to fund their obligations.

Summary

Currency security is just one of the many advantages of using a SIPP. If you would like to explore your options please click on the link below to register for a complimentary pension review.

 

 

 

 

 

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