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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.

Inflation, Interest Rates and Living Costs in Retirement

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.

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.

The Impact of High Interest Rates on Pension Transfer Values

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.

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 doesn’t 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.

Positive Aspects of High-Interest Rates for Pension Savers

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.

Should Inflation and Interest Rates Alter Expat Retirement Plans?

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 won’t 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 isn’t 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.

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.

*Information correct as at May 2023