Currency Control
The benefits of Currency Control in pensions
Getting the exchange rate you want is critical when considering whether to transfer your pension fund, as getting it wrong can cost you thousands of dollars.
“I don’t want to transfer when the exchange rate is so poor”
If you have decided that you wish to transfer but the exchange rate is a concern, please note that Lifetime Financial Security only uses NZ schemes that have ability to keep your money in Sterling until you are happy with the exchange rate. There is also no need to worry about how long it can be held in GBP as there is no time limit for this facility.
Once you have exchanged, you can then start to get your money working for you as sitting in Cash will generally mean that you money declines in real terms after allowing for inflation and fees.
An additional advantage in using Lifetime Financial Security when transferring your pension is that the NZ schemes we use also allow you to buy Sterling denominated investments within your pension portfolio therefore giving you the opportunity for your scheme to start to work for you while you wait for the exchange rate to improve. We would be pleased to discuss with you how this works based on your own circumstances.
In summary the benefits of having the currency features we offer is to give you maximum control and flexibility over when to exchange from Sterling to NZ Dollars while in the meantime allowing your investment to start to work for you.
An important additional by-product of this currency control is that many of our clients actually make more money from getting extra dollars for their Pound than the fee we charge them to organize their transfer!
Do all New Zealand pension schemes offer this level of control?
No they don’t, so choosing the right scheme is vital. Some schemes just convert your transferred funds into NZ Dollars at whatever rate applies on the day the transfer funds are received, so you have absolutely no control.
Some other schemes will only allow exchange rate control if you have more than a certain minimum amount as a transfer value. The schemes we use do not apply any minimum amount for currency control.
If you use a scheme that is unable to keep your transfer funds in Sterling this could give you a nasty surprise as the difference between the GBP and NZD exchange rate on the date your transfer completes could be very different to what it was when the transfer process first started a few months previously.
The following chart illustrates this volatility over a five year period nicely:
Source: Travelex Global Business Payments at 31 March 2010
So, in simple terms what does this all mean?
To summarise as simply as possible the affect that all of the above can have on your final invested money, the following examples will be useful:
Example 1
Joe Bloggs asked an adviser to help him to transfer his UK pension fund to XYZ Superannuation Scheme in NZ. He had a transfer value of GBP100,000.
On the day the transfer process started the GBP to NZD exchange rate was 2.6, a respectable rate thought Mr Bloggs.
However, Mr Bloggs’ adviser used a NZ scheme that had no currency control. Four months later when the transfer completed the rate had fallen to 2.2 and his money is automatically converted into dollars.
At the start of the process Mr Bloggs thought he would end up with a pension fund of $260,000, he actually has $220,000, a reduction of 15.4%.
Example 2
John Smith contacted us to organize his transfer and he also had a transfer value of GBP100,000.
The exchange rate when he started the process was also 2.6 and he (conveniently for the purposes of this example) also completed his transfer when the rate had dropped to 2.2.
However Mr Smith’s money was kept in Sterling and as he was in no particular hurry to exchange, he decided to wait for six months to see what happened. After six months the rate had risen sharply and he exchanges at a rate of 2.85.
This means that the $260,000 Mr Smith expected to receive (remember this is the same as what Mr Bloggs thought he’d get) has risen to $285,000, a gain of 9.6% before tax!
You may think that we have exaggerated the wide variance in exchange rates for the benefit of highlighting what we can offer you. You will see from the above chart that this is not the case and that these types of swings in exchange rate can and do happen. In fact we have clients who have made in excess of $100,000 purely down to our ability to control currency in their pension fund.
Tax on currency gains
Please note that gains on currency exchange are taxable under NZ tax laws but that these gains are taxed within the pension fund and not on the individual. Losses can be offset
Information provided is generic only and should not be taken as advice. The decision on whether to transfer will be based on different factors for each individual and should be based on your own individual circumstances.
Our Disclosure Statements are available upon request and are free of charge.
