I am a Dutch national who has been resident in the UK for the past 25 years and is now within six years of retirement age. Having built up substantial pension fund assets in the UK, I am concerned about the currency risks I face. Should I return to the Netherlands at retirement?
During our recent discussion, you raised the highly relevant issue of Britain's ultimate membership of the European common currency. As you know, the euro formally came into existence on January 1, 2002 for all participating countries. As a result, the common currency now exists among member states which have agreed to specific economic conditions.
The UK has decided to opt out of membership of the euro for the time being, pending further consultation and very possibly a referendum within the next two to three years.
Your feeling is that Britain's eventual membership of the common currency is inevitable and it is frankly a question of when rather than if. The present Government has stated its case and is broadly in favour of the UK joining the common currency, subject to basic conditions being met.
You also feel that, in order to meet with the economic requirements of membership, sterling will need to be devalued against the euro, which will have obvious implications for those holding sterling assets and purchasing goods and services in euroland.
You believe that certain member states have economies which are much less healthy than that of the UK, with various substantial healthcare, welfare and pension liabilities projected into the future.
In addition, a growing number of additional countries, such as Slovenia, the Czech Republic and Poland, are negotiating membership of the EU. As former Soviet bloc countries, their economic health has suffered and clearly they hope to benefit from membership.
Your concern centres on the fact that the purchasing power of your substantial pension funds, denominated in sterling at present, is likely to be significantly reduced in euro terms by the time you reach retirement age. For many UK citizens with no intention of moving overseas, sterling/euro currency movements are less relevant. In your specific situation, we would concur that this could be a potential problem and one that we may like to take action to mitigate.
For UK investors who intend to use their assets to purchase goods and/or services in countries using the euro, the potential devaluation of sterling introduces an additional level of risk in terms of currency exchange. A sensible strategy for such investors could include some form of hedge against this currency risk by investing in assets denominated in a currency aimed at protecting their purchasing power.
Yet the majority of insured personal pension arrangements within the UK are operated by insurance companies and fund managers. Although the underlying assets held within the pension funds may include non-UK investments, they are usually denominated in sterling.
However, it is possible within the terms of current legislation to effectively create your own bespoke arrangement using a self-invested personal pension. A Sipp allows you to invest your fund in a wide range of approved investment vehicles, which could be denominated in alternative currencies.
The Sipp contract provides a legal framework of the arrangement and ensures that the plan will at all times comply with UK pension legislation and benefit from the significant tax advantages therein. But you are not restricted to using the traditional methods of investment such as insurance company with-profits or managed funds and have at your disposal a very wide range of potential investments which are more suitable to your requirements.
In theory, you could transfer the accumulated value of your personal pension fund into a Sipp and take advantage of the investment flexibility available. For example, having affected the transfer of assets, the fund could be used to purchase a portfolio of unit trusts or Oeics denominated in euros. A wide range of approved investment vehicles denominated in euros are available for inclusion within a Sipp.
Obviously, we would be pleased to work with you to establish a suitable investment portfolio which would meet with your overall requirements and acceptable risk profile.