Currency risk: the quiet threat to expat retirement plans

Most retirement planning focuses on how much you will have. For expats, the better question is also in what currency you will have it, and in what currency you will spend it. If those two do not match, a plan that looks comfortable on paper can feel tight in real life, and the cause will not be poor investment returns. It will be an exchange rate.

This guide explains where currency mismatches arise, how large the effect can be, and what you can do about it without trying to predict the market.

Where the mismatch appears

Expats often have several currencies at work in the same plan.

• You earn in one currency. For example dirhams or dollars while working in the Gulf.
• You save and invest in another. Often sterling, because you are British, or dollars because that is what global funds are priced in.
• You hold pensions in a third. UK pensions pay in sterling, and the State Pension is paid in sterling even if you live elsewhere. The government's guidance says yearly increases are paid only in certain countries, so the amount may also stay frozen in a country not on the list.
• You may spend in a fourth. The euro in Spain, Portugal or Cyprus. The Thai baht. The Australian dollar. Or sterling, if you return home.
• You may owe in another. A mortgage on a property abroad is in a local currency while the savings to repay it are not.

Each gap is a currency risk. A single gap can be small. The risk grows when several are stacked, and when retirement lasts 25 or 30 years.

The dirham link

If you work in the UAE, your salary is in dirhams, and the dirham is pegged to the US dollar. The Central Bank of the UAE publishes the official rate as 3.6725 dirhams to the dollar. That peg has been in place for many years, and it means that a dirham earner is, in effect, a dollar earner when measured against sterling.

This matters in two ways. First, the sterling value of your dirham savings moves with the dollar and sterling. Second, a pegged currency can feel stable, which hides the fact that the currency you intend to retire into may not be.

A worked example: a sterling income spent elsewhere

Imagine a retiree who receives a sterling pension of £30,000 a year and lives in a country that uses a different currency.

• At 1.30, the income is worth 39,000 local units.
• At 1.15, it is worth 34,500 local units.
• At 1.00, it is worth 30,000 local units.

Between the best and worst case, spending power falls by almost a quarter (from 39,000 to 30,000), with no change in the pension itself. A drop from 1.15 to 1.00 is a 13% cut in what the income buys.

Now consider a slow drift. If the pound loses an average of 1% a year against the local currency for 20 years, it ends up at about 82% of its starting value (0.99 compounded 20 times). The £30,000 that bought 34,500 local units at the start buys about 28,200 at the end, before any local price inflation. That erosion is in addition to ordinary inflation, which also reduces what the money buys.

Exchange rates can also move the other way. A stronger pound is helpful for a sterling income. The point is not that sterling will fall. It is that you cannot rely on it not to.

The cost of changing money

Exchange rate swings are visible. Conversion costs are not. When you convert currency through a bank or a pension provider, the cost is often hidden in the exchange rate you are given, as a margin above the market rate, rather than shown as a fee.

It adds up because you convert every year. Ask each provider for its margin as a percentage above the market rate, and compare it with other routes such as specialist currency transfer services or multi currency accounts. Check any service is regulated for the activity in the countries involved.

Ways to reduce the risk

You cannot remove currency risk, and you should be sceptical of anyone who says they can forecast it. You can reduce your exposure to the risk of being forced to convert at the wrong time.

• Decide where you will most likely spend. Choose a base case for the country of retirement, and identify a second most likely. Plans built on a country you have not picked can use a spread.
• Match a core of future spending to that currency. If you expect to spend mostly in euros, hold part of the retirement fund in euro assets or in an account that lets you hold euros, rather than waiting until retirement to convert it all.
• Use a mix. A portfolio held across currencies, in proportion to where you may spend, lessens the effect of any one move.
• Build a cash buffer in the spending currency. One to three years of spending held in the currency you need lets you wait out a bad exchange rate, rather than convert at it.
• Convert in stages. Converting regularly smooths the average rate, though it does not guarantee a better one.
• Consider whether to hedge. Hedging, such as a forward contract, fixes an exchange rate for a period, usually at a cost. It is more common with institutions than individuals, and for long horizons it is awkward and expensive. Treat it as a specialist tool.
• Look at the structure. Some pensions, bank accounts and tax wrappers allow you to hold several currencies, and others do not. Check this before deciding where to hold money.
• Keep inflation in view. A currency that falls may import inflation. A currency that rises may hold prices down. They are linked but not identical.

The retirement country question

For many expats the largest currency question is the most basic: where will I retire? A person who expects to return to the UK has little currency mismatch in sterling assets. A person who plans to retire in Spain, with a sterling pension, has a lot. A person who is undecided has a range.

When you do not know, avoid making permanent currency choices too early. Keep flexibility in the structure, not just in the investments. For instance, prefer arrangements that let you change the currency of the money you hold, or the currency of income, without a tax or exit penalty. Check that before committing to any product.

One more point on timing. The risk is highest in the years just before and after you start drawing on your savings. A bad exchange rate early in retirement matters more than a bad one late, because you convert more money at that rate for longer. That is another reason to build the spending currency position gradually in the years before you stop work, instead of leaving it to the last month.

Stress test your plan

A practical approach is to run your retirement figures under several exchange rates and compare the outcomes.

1. Write down your annual spending in the currency you will use.
2. List your income sources and their currencies: State Pension, private pensions, rental income, investments.
3. Convert everything at today's rates and note the surplus or shortfall.
4. Repeat with your income currency 10% weaker, then 20% weaker.
5. See where the plan breaks. If a 15% move leaves a shortfall, that tells you how much cushion or matching you need.

Our retirement calculator can help with the base case. Remember to test a lower value for the State Pension if you will live in a country where it may not be increased each year.

Treat the examples in this guide as a method, not as predictions. Replace the rates with ones that are realistic for your own countries, and keep the exercise simple enough that you will repeat it every year or two.

Common mistakes

• Assuming today's exchange rate will last. It may, but plans should not depend on it.
• Ignoring conversion costs. A margin of a few percent compounds over decades.
• Treating a pegged currency as safe in every direction. A peg to the dollar provides stability against the dollar, not against sterling or the euro.
• Converting everything at once at retirement. This concentrates the risk in a single moment.
• Chasing the best currency. Moving money because a currency has recently risen is speculation.
• Ignoring the effect of a move. A relocation changes your currency profile. Review the plan after any move.
• Forgetting assets and liabilities. A property or loan in another currency is part of the picture.

Questions to ask

1. In which currency will most of my spending be, in each retirement country I am considering?
2. What currency are my pension and investments held in, and can I change that without cost?
3. What margin do my bank, pension provider or platform charge on currency conversion?
4. Does my pension or tax wrapper allow multiple currencies, and what does switching cost?
5. What happens to my plan if my income currency falls by 10% or 20%?
6. Will my State Pension be increased each year where I will live?
7. Would a cash buffer in the spending currency be sensible for me?
8. If hedging is suggested, what does it cost, how long does it last and what happens when it ends?

What to do next

• List your assets, income and spending by currency.
• Find out what you pay each time you convert money, and compare other routes.
• Pick a base case and one alternative for where you will retire, and run your numbers for both.
• Stress test with weaker income currency scenarios.
• If the numbers are tight, or the sums are large, speak to a regulated adviser who understands both your current and likely future country.

Retirement, 9 minute read. Last reviewed October 2026. Applies to: Any country. General information, not personal advice.