Four ways to get the best exchange rate
With polls showing that the Conservative party’s election lead is weakening, a hung parliament is becoming increasingly likely. If this happens, the prospect of a coherent policy to tackle the UK’s budget deficit being implemented will fade, and it is widely believed that the pound will suffer.
A weakening of the pound in already-volatile currency markets will make money-changing decisions increasingly difficult. So how can you make sure you get the best rate if you regularly travel abroad or need to exchange a lump sum? Here are a few tips.
1. Take out a pre-paid currency card
These cards work like a debit card, but avoid the fees associated with using plastic abroad. They are issued by Visa, MasterCard and Maestro, and can be used in shops and restaurants.
You load the card with currency online, over the phone or via text. The money is taken directly from a linked current account. The initial fees providers charge vary, but one particularly attractive option is a Caxton FX currency card, which has no ATM charges, fees or commission on transactions and no application fee.
It also locks in the exchange rate on the day you load the card rather than the date you make a purchase, so you can take advantage of a favourable rate at any time in preparation for your trip.
Be sure to check for minimum load and ATM withdrawal limits, and do not use the card at ATMs in the UK as this can incur charges. Other providers include FairFX, my Travel Cash and the Post Office.
2. Use a foreign currency broker
Currency brokers provide a service for those who make regular payments abroad or want to convert a lump sum. As they are specialists, and buy currency in bulk at a wholesale rate, they usually offer more attractive exchange rates than banks.
On the downside, minimum payments can be high. The attraction is that if you are concerned about currency fluctuations you can often fix an exchange rate with a broker for an extended period and avoid currency market volatility.
Jonathan Spring-Rice, senior wealth adviser at Towry Law, says: "This service is great for those with a sterling pension who have retired abroad. Rather than put their sterling pension into a UK high street bank account, they can set up regular payments into their foreign bank account."
To compare the fees, exchange rates and speed of providers, go to sendmoneyhome.org.
3. Open an offshore account
"HMRC has had a field day with people parking money in offshore accounts who have tried to keep them secret," says Nick McBreen, an independent financial adviser at Worldwide Financial Planning.
However, there is no reason why you shouldn’t have an offshore account, providing you declare it.
Offshore accounts have tax benefits, but they also allow you to choose the currency you keep your money in. If sterling is going through a weak period, and you use another currency regularly, you may want to make this your default currency.
But Spring-Rice warns: "If you are a UK taxpayer and you convert currency, and then convert it back again later, if you make a gain from it that is a capital gains tax event so you’ve got to be careful."
It is sensible to keep records and consult an accountant if you are unsure about the tax implications of your actions.
4. Think about offshore bond funds
If you're planning to move abroad in five years' time, you could stash your money in the meantime. The attraction with offshore bond funds is that you can manage investments offshore, where they are not viewed for tax purposes as income-producing assets.
McBreen says: "You can move money and switch currency without incurring capital gains tax every time, and as long as the fund is correctly structured you can choose which currency the bonds are denominated in."
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.