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For the past nine years, I have been working in the UK. I will retire in four years but continue to live here. Most of retirement income will come from US sources (retirement accounts--primarily rollovers from previous American employers—and social security benefits). The currently weak dollar seriously erodes funds that could be converted from USD to GBP for living expenses in the UK. The dollar is about one-third less in pounds/sterling than it was a few years ago. In a case like this, does anyone have any suggestions for making the conversion from dollars into a foreign currency less expensive? Thanks.
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There seems to be two things here.

1. A general comment about how the USD is weak relative to the BPS now compared to the last few years. No questions asked, just some comments about the present rates.

2. A question about how to reduce the expense of converting from one to the other.

To provide an answer the question needs to be refined. It is not clear if you want advice on how to lock the rates for a period of time so you can do monthly transfers or if you want to move a large sum across as a one-off transaction.

If you want the best rates for a specific transaction then you need to move a large enough sum that the bank will provide a rate better then normal retail. I have done this a number of times with Citi. If you had more then 20K to move in one direction you can call in and ask for the wholesale rate. Assume there are three rates (retail for small stuff, wholesale for large transaction from the retail customers and then rate at which a large corporate can move very large sums). I found that I would generally get a rate that was pretty close to the closing rates quotes in the press for the wholesale market.

If you want to hedge you exposure from monthly income then you can contact a number of firms that allow you to lock in payments over a period up to 48 months. Many of the services are designed for Brits with property in another country where some of all of the income is in one currency but the bills are in another currency.

John

- US citizen living in the UK and dealing with cross boarder transactions as a regular event.
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Greetings, John,

Many thanks for your reply.

"It is not clear if you want advice on how to lock the rates for a period of time so you can do monthly transfers or if you want to move a large sum across as a one-off transaction."

I don't necessarily want to do anything right now. I won't need the US funds for living expenses in the UK until I retire in four years. Because it will be necessary for me to make currency conversions during my retirement, I am shocked at how my resources could be eroded during retirement--compared to a few years ago--because of a weak US dollar against the British pound.

I am seeking suggestions about how to deal with the situation. One possibility, of course, is to do nothing in advance but just accept existing exchange rates when I will need to make the conversions (probably annually) during retirement. On the other hand, there might be ways--which I am unaware of--of beginning to prepare now for the possibility of a poor exchange rate when I need to start converting during retirement.

The only idea that has occurred to me is to start converting funds now in order to fund my wife's and my Individual Savings Accounts (ISAs) to the maximum each year. For stateside readers, a British ISA is similar to an American Roth IRA. An individual residing in the UK can contribute up to 7,000 pounds (about 12,500 dollars) each year to an ISA, the earnings on which are tax-free. From my British income, I can fund my own ISA at 7,000 each year, but not my wife's also. In terms of what exchange rates were a few years ago, it would be costly to fund my wife's ISA from US resources, but it might be prudent to do so.

I welcome any suggestions.

WMC
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I am a real estate investor. I invest in the US and the UK (and other places).

As a general rule of thumb I try to line up the income and expenses when it comes to the currency. Hence I borrow locally and look for local income.

Back to the question at hand.

1. The exchange rate is not in your favor. Based on some views it might not get any better over the next 4 years. Hence waiting is less of an option then one might think.

2. If you really are convinced that you will not be moving back to the US or expect to have commitments in the US that need USD income then you really should be moving your assets to the UK. Both to have them in Sterling and partially to have them aligned with the tax regime in which you are living.

3. ISA's are not a bad idea. If you were to move the money each year for the next 4 years then run some numbers to see what it might look like. Run the same analysis but move the money all in the 4th year and skip the potential tax advantages of the ISA.

4. You need to look at your investment options. If for some reason you knew a way to invest the funds in USD and earn a significantly higher return then if you brought them to the UK there could be a case to be made for leaving the funds in the US.

Example:

I know invest money in the US at 10% or higher by focusing on specific opportunities that do not exist in the UK. Differences in the marketplace with the UK being less developed in the specific opportunity. So, I can take a bit of a currency hit if my USD investments perform better.

5. Currency hedges. As I might have mentioned before, there are products that you can buy to hedge your position. This might be of value if you thought the USD would go down significantly. You would have to work the numbers to see if it is better to move now or to hedge the downside while hoping for an improvement in the USD/BPS rate (improvement from the USD side).

Questions?

John

PS. To stretch your thinking a bit more. What do you expect for investment returns if you had a funded ISA? What if you could earn 10% or higher in the US? How about 15%? What happens if you fund your ISA and leave the rest of the USD in the US for now (girlfriend would then need to either fund her own ISA or miss out on the opportunity).

As a US resident you may be able to elect to be resident/non-resident for UK tax purposes. As such the US income would not be taxable in the UK and you can bring it across later with no tax owed the UK. If the funds are invested in the UK the US will still expect you to pay taxes on the UK income so you might find the tax rules work against you. Yes, the first 70K USD is free but...
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Thanks, John. You have given me a lot to think about. To answer some of your questions:

Most (83%) of the US investments are in IRAs (rolled over from previous American employers), so there is no question that that portion of the investment will remain in the US.

I am a *UK* resident, and must declare myself as such for UK tax purposes (as I understand it). That's what I have done for the past nine years. ISAs are the only investment that seem to make sense for me here. Outside of an ISA, I would have to pay 40% of the earnings in taxes.

In 2003 for US tax purposes, the limit on foreign earned income exclusion was $80,000. I thought that only earned foreign income was taxable in the US. Is interest income, etc. earned in the UK (including that within an ISA) also taxable in the US?

Aside from the tax issues, calculating what I would likely earn from investments in the UK versus the US seems very difficult to work out. However, at present cash investments clearly earn more in the UK, where the annual percentage rate is now over 5%.

WMC
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I am in a similar situation - I plan to retire to the UK in 3 years when my daughter goes off to college. I have a lot of assets here in the U.S. and not surprisingly, most are in USD. Unfortunately, for purposes of buying anything in Europe, US dollars are looking more and more like monopoly money, and I don't really think it will get better in this 3 year time frame.

I have found references to currency options (calls on pounds sterling) but have not yet been able to find a good place to get those quotes. Depending on the premiums, it might be better (as John said) just to sell US assets to buy Euro- or Pound-denominated securities.

TIA,

Sam
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WMC,

As we already covered a few things I will focus on just one item from your last post.

Aside from the tax issues, calculating what I would likely earn from investments in the UK versus the US seems very difficult to work out. However, at present cash investments clearly earn more in the UK, where the annual percentage rate is now over 5%.


In my case I can find better deals in the US right now. I earn 10% fixed and secured on my US investments but can not find similar in the UK. One recent deal I did was just a share over 11% and the return is fixed for 5 years.

John
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Greetings, Sam!

It is comforting to know that there is someone else in a similar situation as me. The various ideas brought up in the current thread are leading me to conclude that I should not do any switching right now.

Miles
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"In my case I can find better deals in the US right now. I earn 10% fixed and secured on my US investments but can not find similar in the UK. One recent deal I did was just a share over 11% and the return is fixed for 5 years."

John,

Where do you find deals like that? I have just shifted all of my US assets to Vanguard to be invested in index funds--to be divided among bond, total stock market, REITS, international, small-cap value, and large-cap value index funds. The best yield at Vanguard--that is relatively low-risk--is about 4% on the total bond market index fund.

Miles
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I am a lender on property deals. There are multiple approaches but one label is 'discounted notes'.

BTW - 10% is as low as I go. I normally do not talk about higher as folks assume it can not be true. Hence there is no value letting people know as they want to believe that 4% is the best they can do.

The risks are certainly different then the Vanguard fund that you speak of. I am not saying that I am taking more risks. Just that I am taking different risks as you can sell any day you feel like it with one phone call.

As I do not mind earning high returns for long periods of time I am willing to give up the ability to sell on short notice.

We can cover the topic in more detail here or by email. From past experience next to no one is interested here so your call where we discuss it if that is what you want to do.

John
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There are a number of currency hedging strategies which may or may not be appropriate in your situation -


* forward foreign exchange deal - lets you sell $ against pounds at a fixed day in the future at a fixed exchange rate - basically locks in today's exchange rate into the future

* borrow $ (can you do that against your IRA?), convert the payout to pounds, and invest (your personal "carry trade").

* currency swaps - lets you swap principal and income payments from $ into another currency


You may want to talk to an experienced Private Banker ;-)


SB

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Greetings, SB:

Thanks very much for this information. This is all new to me. Can you tell me where I can find out more about these strategies? My local banker won't know anymore than I.

WMC
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My local banker won't know anymore than I.


Probably. In any case, due to those products usually being sold on an over-the-counter basis you're likely to need an upscale (e.g. private banking) rather than retail relationship to execute the first and third strategy. These accounts ($$$) usually come with product experts that know what they're talking about ;-) Given the amounts generally involved when it comes to retirement it may be worthwhile.

Otherwise, the second strategy is something you could try yourself.

SB
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If you are looking for a private banker you will likely find that they have no interest if you are not talking about significant sums

The bankers in the UK that are just below the 'private banking label' normally expect 100K in investable funds. These folks normally call themselves wealth managers.

The old definition of private banking would expect you to have over 1 million (USD is fine).

I have contacts in all of the above as I used to work for the largest private bank (UBS, the largest Swiss bank).

John
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I have never before heard of private bankers. What do they do (compared to "ordinary" bankers)? What services do they provide? Are they expensive? Where does one find them? Thanks. WMC
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I have never before heard of private bankers. What do they do (compared to "ordinary" bankers)? What services do they provide? Are they expensive? Where does one find them?

Ok. They essentially serve "high net worth individuals", at a price of course, and the idea is that they primarily look after your objectives and interests, rather than the bank's.

Point is, you can use them to analyse your personal situation (not just your accounts, but your entire life, including retirement needs, education, succession planning, inheritance, tax, risk mitigation, etc. etc.) and come up with a personal plan to support YOUR needs and objectives, and then sell you the (often custom-tailored hence otherwise hardly accessible) products you really need to achieve them.

While the Swiss Banks (largest being UBS and Credit Suisse) are the traditional leaders in this segment, almost any other self-respecting financial organisation has a Private Bank or at least personal bankers/ wealth advisors. You should have no problem obtaining this type of service in London or large US cities (although you may have a harder time finding truly international [multi-currency] service in the US).

As someone else pointed out you'll need a sizeable level of assets to access this type of service, plus they charge you a yearly percentage for the service. Perhaps an independent wealth advisor is the cheaper route however then access to the products may be tricky.

SB


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"If you want the best rates for a specific transaction then you need to move a large enough sum that the bank will provide a rate better then normal retail. I have done this a number of times with Citi."

John,

I no longer have a bank in the United States, just a credit-union account for writing small checks, index funds, and a brokerage account. It sounds like I need to open a bank account in America in order to get a discounted rate of exchange when I need to transfer funds from the US to the UK. I would appreciate your suggestions for finding a suitable American bank for this purpose. You mentioned Citibank. Can one have a general, Internet-based account with Citibank, rather than an account at a specific brick-and-mortar Citibank?

Thanks.

Miles
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Miles,

Not sure about your question concerning Citi.

If you are UK based, HSBC has a program for people in the UK and US. I think the UK offices know more about it then the US (the UK drove the product definition from what I understand).

There are UK firms that let you do exchanges as almost wholesale rates. They are not banks. They just do the exchange. You might consider moving the funds to them when it is time to transfer the funds. You would need to wire or otherwise move USD to them and let them send on the Sterling. Hence you need to check what they recommend for how best to move funds to them. Most of these firms tend to advertise in publications targeting Brits who want to buy property in Europe, the US, etc. They can offer binding deals that are up to 4 years in advance if you know you have something coming up in the future.

John
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