Warning to 1.1 million pensioners living abroad ahead of the Budget: "Don't get comfortable"

Experts have issued a warning to 1.1 million pensioners living abroad ahead of the Budget with one saying “don't get comfortable”.

With the Budget on the horizon, and the markets pricing a near-certain Bank of England rate rise on 5 November, the pound could be hit negatively.

There are 1.1 million State Pension recipients living overseas who are paid in pounds – which is then converted to the local currency.

Experts told Newspage that a weaker pound means pensions converted into local currency buy less.

Dave Huggett, Founder at Lucid Foreign Exchange, said: "Nobody knows which way the pound goes with 100% certainty, and a rate rise that's already priced in is already in the exchange rate, so what moves sterling is the surprise, whether that's the Budget's borrowing figures or the tone the Bank of England sets on 5th November. 

"If the pound does fall, the same pension buys fewer euros or dollars because the amount is fixed in pounds and the conversion happens at whatever the rate is on the day. A stronger pound works the other way round. The advice for pensioners abroad is to stop treating each payment as a one-off conversion at whatever rate you get on the day. 

“Work out what you need over the next few months, convert in stages rather than all at once, and look at a regular transfer arrangement that fixes the rate for a set period, so the budget for living costs doesn't depend on one week's news.”

Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, said every wobble in the pound affects the income of pensioners living abroad.

He added: "Ahead of the 28 October Budget, sterling is riding high against the euro on the back of France’s debt woes, hitting a 16-month high on Wednesday, great news for British expats on the continent. Don’t get comfortable. 

"A third tax-and-spend Budget from Labour is likely to draw a sharp thumbs down from the bond markets, and that could see the UK follow France into a full-blown debt crisis, and a currency crisis usually trails behind. Markets despise fiscal unpredictability; surprise tax changes, heavier borrowing or weak growth forecasts trigger sudden sterling selloffs. 

“A Bank of England rate rise would normally support the pound, but a gloomy outlook can undercut it. The 1.1 million UK pensioners overseas are paid in pounds, so every wobble hits their income."

Scott Gallacher, Director at Leicester-based Rowley Turton, said the pound will only move if any unexpected announcements happen in the Budget.

He added: "Currency markets are forward-looking, so if the Budget and interest rate expectations are already priced into sterling, we shouldn't necessarily expect significant movements. The real risk is an unexpected announcement that catches markets off guard. 

"A weaker pound means those relying on UK pensions, savings or rental income to fund retirement overseas will see their income fall in local currency terms, potentially reducing their standard of living. Much depends on where pensioners hold their wealth, where they spend their money and whether they might return to the UK. 

“Holding more assets overseas could reduce currency risk, but it creates other risks. We've seen people sell their UK homes to retire abroad, only to find that exchange rate movements and rising UK property prices make returning home difficult. The key is long-term planning rather than reacting to short-term currency movements.”

Harvey Dhillon, Founder & CEO at Zmartly, urged pensioners to check what tax they are paying.

He added: “Whether the Budget hits the pound is for the currency markets to decide. If it does, yes, less arrives, because a State Pension paid into a bank abroad is usually converted at the exchange rate at the time. The part a pensioner can change is tax. 

"For a retired couple on the State Pension and a company pension, the State Pension usually comes without UK tax taken off. The company pension can keep arriving with UK tax deducted, though most double taxation treaties say it should be paid without UK tax to a resident of their new country. 

"HMRC's claim form, with its own version for places like Spain and France, usually goes first to the tax office where you live. You can only claim once the pension has started, and any refund can go back to the day you became resident there, within HMRC's time limits. If the pound does fall, that's money a pensioner can least afford to leave with HMRC.”

Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, said it isn't clear what will happen to the pound due to the Budget.

She added: “The Budget could move the pound sharply, but nobody should pretend the direction is guaranteed. If markets like what they hear on borrowing, tax and the public finances, sterling could strengthen. If confidence takes a knock, it could weaken. For pensioners living abroad, that matters immediately. 

"A weaker pound means the same State Pension buys fewer euros, dollars or other local currency when it is converted. For someone relying heavily on UK income, that is effectively a cut in spending power. My advice is not to gamble next month’s grocery money on an exchange-rate prediction. 

"Keep a sensible local-currency cash buffer, understand the conversion charges you are paying and review how the pension is received and exchanged. Retiring abroad does not remove currency risk. It makes currency part of your monthly budget.”