How Interest Rates Affect Expat Pensions

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How Interest Rates Affect Expat Pensions
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• Inflation has been a big talking point over
  recent months, affecting almost every country and
  in many cases reaching double digits.
• Currently, UK inflation is wavering at around the
  10 mark, with EU countries experiencing an
  average and persistent inflation of roughly 8.5.
  The knock-on impact is that interest rates are
  also at significant highs, as central banks lift
  base rates to try and bring inflation down to
  more sustainable levels.
• For investors, retirees and particularly expats
  with varied investment and pension products,
  potentially in more than one country, it is
  important to understand what this means for the
  costs of retirement and the returns you might
  expect to achieve on your pension funds.

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Inflation, Interest Rates and Living Costs in
Retirement
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• The first consideration is to evaluate when you
  expect to retire because if you are saving into a
  pension scheme with the anticipation of retiring
  in several years, the current inflationary
  economy may not be as significant as for somebody
  expecting to retire in the short term.
• It is also important to evaluate your existing
  pension products and the benefits they are
  expected to provide, not least because average
  living costs have soared again, around the
  world by at least 20, and in some cases, much
  more.
• Primary cost factors include energy prices and
  groceries, and although these outgoings are
  expected to stabilise and return to normal
  affordability levels over the course of the
  coming year, all pension savers should be
  conscious of whether their current pension plans
  are going to provide the financial freedom they
  expect.

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• The Pension and Lifetime Savings Association
  (PLSA) has quantified the impacts, reporting that
  a single individual resident in the UK now needs
  a minimum of 37,300 per year to live
  comfortably, meaning that an average couple
  eligible for the full State Pension would need
  retirement wealth of 328,000 each.
• As an expat, these forecasts and assumptions
  become more complex when currency exchange rates
  and tax obligations come into the mix, but
  analysing the value of your existing funds, and
  comparing that to your expected requirements to
  finance your plans and lifestyle, is necessary.
• It may also be the case that your living costs
  change depending on your residency status and
  where you live such as your eligibility for the
  State Pension, protected from inflation by the
  triple lock, your tax position and liabilities
  incurred against pension benefits, and the
  average cost of living or purchasing a property
  in an overseas location.

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The Impact of High Interest Rates on Pension
Transfer Values
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• The next, equally important assessment is your
  pension transfer value, especially if you plan to
  transfer British pension funds or those in
  another jurisdiction to an overseas scheme, for
  example, through the Recognised Overseas Pension
  Scheme (ROPS) system.
• Of course, this is one of several potential
  routes, depending on your circumstances, and
  another solution might be to retain funds in a
  UK-based product such as a Self-Invested Pension
  Plan (SIPP).
• However, transfer values remain influential. Any
  pension provider that is asked to provide a
  transfer value needs to offer a reasonable
  valuation, which may vary depending on factors
  such as
• The number of years until your expected
  retirement.
• Assumptions on your health or life expectancy.
• Inflation rates.
• Returns and yields on the funds your pension is
  invested in.

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Many British fund providers invest in gilts as a
low-risk investment, which contributes to the
returns made. The result is that where gilt
yields are higher, so too are returns, and vice
versa. As a scheme holder, there is the
possibility that a pension fund providing a fixed
income will have fallen in transfer valuation
terms, because of inflation, with some schemes
dropping in transfer value by as much as 18
between 2021 and 2022. While that doesnt
necessarily mean you cannot transfer a pension
overseas to cater to your plans as an expat, it
could infer that your pension will be deemed less
valuable in the interim until interest rates and
bond yields begin to fall down to previous
levels.
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Positive Aspects of High-Interest Rates for
Pension Savers
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Just as inflation and high-interest rates can
have myriad effects on pension transfer
valuations, living costs and other elements of
retirement planning, there may also be benefits
for pension savers who find that returns on their
savings and investments increase in line with
record-high interest. Although the successive
base rate increases implemented by the Bank of
England are widely seen as negative, the
corresponding effect is that most savings,
accumulating returns based on interest earnings,
have also grown although not necessarily at the
same pace as interest charges on borrowing. The
intention behind higher base rates is to
alleviate cost pressures for everyday expenses
such as fuel, electricity and food, but it also
means that interest rates are more attractive and
may provide better returns on annuities held as
part of retirement financial planning.
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Should Inflation and Interest Rates Alter Expat
Retirement Plans?
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• Some expats living as foreign nationals are
  naturally concerned that their original
  retirement plans require adjustment, because
  inflation means they need a larger pension pot to
  cover their outgoings, they need longer to save
  and invest, or they wont achieve the same value
  in real-world benefits and lump sum drawdowns due
  to changes to their fund valuation.
• Retirement decisions depend on multiple factors,
  so there isnt one easy answer that will be
  appropriate for every expat
• Those some way from retirement will likely find
  that inflation will not, in the long term, make
  materially critical changes to their pension
  plans since rates always ebb and flow.
• Those closer to retirement may need to review
  their plans and pension funds to evaluate the
  value of their scheme and the benefits available.

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Pension funds also cover broad areas of
structures, schemes, locations and investment
approaches, so there is also the possibility that
your fund is not particularly sensitive to
inflation, depending on the valuation method
used, such as minimum present value pension
valuations. The ideal approach is to look at the
bigger picture to assess your non-pension assets,
investments and wealth, anticipated expenditure,
including familial support and healthcare cover,
and how well your existing finances cater to your
objectives and plans. If you would like further
advice about the value and stability of your
expat pensions, how to adjust pension plans to
account for inflation and high-interest rates, or
simply wish to reassess your retirement
expectations to ensure your investments and
pension funds remain suitable, please contact
Chase Buchanan Private Wealth Management at any
time.
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