Make your money travel cheaply
Friday September 29, 2006Mark King
Money makes the world go around, but only at a price. If you wish to transfer money abroad using a high street bank, you could pay up to 4% in commission. That might not sound like much, but if you need to transfer £250,000 to purchase your dream home in France, it could translate to a £10,000 kick in the teeth. Fortunately, there is a better way to move your money.
Foreign exchange providers are becoming popular choices for Brits looking to move or retire abroad. They can send money overseas cheaper and quicker than a bank or building society, offer advice about timing and movements in the currency markets, and tailor service to customers in a variety of situations.
Mark Bodega of currency broker HIFX says cost is a major factor. ?By all means go to a bank,? he states, ?but at least shop around before you do so, because you?ll soon discover that banks charge an outrageous amount of money for currency trades. Don?t just automatically assume your friendly high street bank will offer you a good deal.?
By using a foreign exchange broker, you?ll save on the commission but will also obtain a better exchange rate than that offered by your bank. Banks only offer ?tourist? rates to individual customers which, at 2% to 3 3% more than those offered by currency brokers, are poor value.
You will also save on other bank fees including transfer charges (usually between £20 and £40 for every transfer) and, depending on where you're sending the money, up to another 0.5% in overseas bank receiving fees. Currency brokers, on the other hand, will transfer your money abroad for free, charging no commission or transfer fees.
According to currency trader Foreign Currencies Direct (FCD), the most popular countries for people to send money to at present are: France (30% of all transactions); Spain (18%); the US (12%); and Cyprus (9%). The most common reason for transferring a lump sum is for buying a property. In this instance, currency transactions are crucial because sharp movements in the currency markets could affect the final purchase price of the property.
Robin Haynes, a director of currency broker Foreign Currencies Direct, says this can run into the thousands. ?In May 2005 we had a client who had found a property in Europe for which he had a balance of 150,000 euros to pay. In the first week of June, when the euro reached 1.52 to the pound, the property would have cost him £98,684, but when he came to make the final payment on July 20, the euro had dropped back to 1.44, the result of which was a final price of £104,167 ? an additional cost of £5,483 in only six weeks.?
Clearly, timing is everything. If you walk into a bank and ask for money to be transferred abroad, you will get the rate of exchange at that exact time. But a currency broker will watch rates for you and help you make an educated guess as to the best time to convert sterling into another currency.
If the exchange rate is highly favourable† right now, brokers can fix the rate of exchange at today?s rate using a forward contract ? even if you won?t need the money for up to two years. This is particularly useful for those people who might be buying property abroad, but are uncertain of the final completion date.
?If you?re buying property off-plan and need to send over a deposit followed by further payments, you can do this using a series of forward contracts,? explains Bodega. But if you do decide to use a forward contract, bear in mind that you will have to pay a deposit of around 10 per cent of the total amount to be transferred.
If you are planning on moving or retiring abroad permanently, there is a good chance your salary will be paid in sterling (and your pension payments definitely will be). This can prove costly. According to HIFX, over a million pensioners are now living abroad and claiming their pensions from the UK. Every month those claiming a pension through their bank are charged transfer fees as some overseas banks levy up to 0.5 per cent just to receive the transfer.
In a typical year, pensioners living abroad are paying over £400 in bank charges and fees just to be able to spend their pension abroad. Moreover, if pensioners use their bank, their pension is continually exposed to fluctuating exchange rates, making the value of their pension rise and fall throughout the year. For the 1 million+ UK retirees living abroad, this can be financially painful.
Retirees living in South Africa are one of the most exposed because the exchange rate tends to fluctuate greatly. For example, a retired couple claiming state pension allowance of £568.53 per month from the UK would have received 7,156 in Rand in June 2005 but just 5,919 in February 2006. That?s a difference of 1,237 Rand, or £113.64.
A foreign exchange broker will transfer regular monthly amounts for free, charging no commission and no transfer fees (but note that not all currency brokers offer preferential exchange rates on small, regular amounts).
Crucially, a currency broker can also fix regular monthly amounts at the current rate if it is favourable ? meaning pensioners in particular will know exactly how much they have to spend every month rather than seeing their pension fluctuate in tandem with the exchange rate. FCD says that someone sending £800 per month to France would save £72 a month from not paying commission of 2 per cent (the average), paying no transfer fee and obtaining a commercial exchange rate instead of a ?tourist? rate. This equates to £864 every year.
It is possible to remove currency risk from your pension payments completely by transferring your actual pension abroad, but this can be costly as well as difficult, making it a worthwhile option only for those with larger pension funds. Moreover, you are not generally allowed to move pension funds to which you no longer make contributions to. Contact the Pensions Advisory Service (OPAS) for more information.
If you are interested in finding a currency broker, make sure you choose a company that specialises in foreign exchange only and has at least three years of audited accounts. Also, always get independent quotes from elsewhere before you commit to one particular broker. If you are buying property in Spain specifically, ensure the company allows you to send payments without the Spanish receiving bank making charges. Most Spanish banks charge an administration or handling fee of up to ?500 per ?100,000, but a reputable currency broker will help you avoid this charge.
Finally, ensure the company you choose has the authority to be a ?money service business? as defined by HM Revenue and Customs. This is important as if affords consumers a level of protection. Brokers aren?t regulated by the Financial Services Authority, so the HM Revenue seal of approval is crucial. Happy spending!
Foreign Currencies Direct