No such thing as a free lunch, or is there?
From time to time we all find ourselves having to transfer funds abroad. I myself had to transfer a fairly modest amount recently and decided to check the many specialist currency exchange companies to see if I could better the rate quoted to me from my bank. Usually I’d just send international payments via internet banking and accept that there’s not a lot I can do about the rate offered. It’s the sort of cost we don’t really see. It is what it is. In any case, why go to the bother of setting up an account and using a different and possibly complicated system just to save a few pennies on the pound?
What I found came as quite a surprise. For every £1,000 I intended to transfer, I could save €27.40* according to the FC Exchange converter compared to the average bank rate. The old cliché about there being ‘no such thing as a free lunch’ immediately came to mind. Well, I’ve beaten the cliché and have proved they contain only an element of truth. That €27.40 was going to buy me quite a nice lunch, which will taste all the better for being ‘free’. Whilst enjoying my steak and chips, I started thinking about other ways expats and internationally mobile people could benefit simply by transferring funds via an intermediary rather than their bank. Old habits are hard to break, however a lot of us actually use specialist currency intermediaries without knowing it.
Most international financial institutions use currency specialists as a matter of routine. When we set up an international portfolio of investments, we typically buy funds in a variety of currencies. This inevitably incurs exchange fees; however international finance companies benefit from ‘institutional’ rates when trading currencies. These benefits are usually passed on to their customers in full. In my example above, this would mean an extra €274.00 allocated for every £10,000 invested. Similarly QROPS providers also use specialists when moving money in and out of a member’s pension scheme. This is where things start to get really interesting. If we consider the average QROPS pot to be in the region of £200,000, those which require the € as their base currency will benefit to the tune of €5,480 when the trustees send the money to the investment manager. That amounts to quite a few free lunches indeed!
Example of how to transfer funds abroad
Many expat retirees retain financial interests in their home country. Some own properties which generate rental income, some have commitments back home which require monthly payments, and others simply need to transfer the proceeds of a house sale. Let’s have a look at a typical expat and see how much could be saved (or earned if you prefer) by using a currency specialist.
Mr and Mrs Smith have worked hard all their lives in the UK and decide to retire to Spain. They have £500,000 invested in UK pension schemes which they are going to transfer to a QROPS, property worth £400,000 with no mortgage and other savings of £100,000, most of which is earmarked to pay their two children’s University fees. Both children are at Universities in the USA having been accepted for sports scholarships. Fees of £15,000+ per child need to be found for the next 3 years. They expect to use all of their £100,000 one way or another.
Let’s see how much they stand to save if we assume the same percentage gain highlighted above of 2.74% when using a currency specialist. In the first instance they decide to purchase a three year forward contract to fund the US education fees, as they want to avoid currency fluctuations between the US$ and £, thus securing the 2.74% advantage.
Thereafter the £500,000 QROPS transfer produces an additional €13,700 as their £s are converted to Euros. The house sale proceeds of £400,000 are used to buy a new property in Spain and fund a local bank account, as such all of these funds need to be transferred to Euros. This produces another €10,960 of savings. The University fees transfers save another $2,740 which equates to €2,414 ($1 = €0.88). Therefore, the grand total of savings amounts to €27,074. Free lunches for years to come!
Opening an account is remarkably quick and easy. All you have to do is register with your currency manager of choice and they will take care of everything from then on.
*Exchange rate calculated at the time of publishing
Phil Loughton – Senior Consultant