How to keep one step ahead of exchange rates
We all know we shouldn't do it, but somehow it always happens. Minutes before your flight leaves, you're at the Travelex in Heathrow airport, hurriedly changing your sterling into euros and getting very little back.
While this might be a little extreme, currency fluctuations are shrinking budgets. From buying holiday money to splashing out on that dream property abroad, to transferring pensions into an overseas account - what are the best (and worst) options when it comes to exchanging currency?
For small amounts of holiday money, currency cards have quickly risen in popularity and are by far the cheapest way to take currencies around the globe.
Some of the most popular include the Caxton FX card, the FX currency card and the Travelex Cash Passport. All are available in euros, dollars or as an "anywhere" card, which you can use for any currency.
Simply, these cards are a prepaid account that work in the same way as a debit card - you load money onto it, and it's free (or cheaper) to use at the cash machine and for foreign transactions. The provider makes its profit from the currency exchange - although slightly worse than commercial rates, it"s still more competitive than the high-street banks.
The cards all have slightly different exchange rates and some are more competitive than others, so check before you sign up.
"The main benefit of currency cards is safety," says Rupert Lee-Browne, chief executive of Caxton. If you lose it or it gets blocked, your current account will not be affected and Caxton will provide you with a new card.
"They're also convenient, so no more queuing up at the M&S bureau de change in your lunchbreak. Plus, there are no withdrawal fees, no initial charge and no fees to load it or at point of sale with a Caxton card."
Christina Weisz, sales director of Currency Solutions, estimates that you can save between £80 and £100 on a week's holiday just by using a currency card. It offers the PocketCurrency card, which works in the same way as the Caxton card.
Debit and credit cards
It's no secret that debit and credit cards are the worst offenders for overseas charges. Britons will spend around £335 million on these fees and charges while abroad this year, according to research from Travelex.
While customers of Nationwide's FlexAccount debit card enjoyed fee-free holiday transactions until the building society cut the offer last year, it's now only Norwich & Peterborough Building Society's Gold current account that offers such a perk, charging no withdrawal fees or transaction fees when used abroad.
However, without knowing the exchange rate beforehand, it's hard to ascertain whether the deal is quite as sweet as it sounds.
Some debit cards - those from Santander, Halifax, Lloyds, NatWest and RBS, for example, charge two fees: a flat cash withdrawal fee and a 'load' charge of around 2.75% each time you use it. Coupled with a non-competitive exchange rate, it's a pretty poor deal, and these costs can quickly mount up on a holiday.
Of the credit cards, the Halifax Clarity card has no foreign exchange fees or cash withdrawal fees, although the bank charges interest even if you repay the balance in full at the end of the month. The Santander Zero card offers the same terms, although there is a £10 'dormancy' fee if you don't use the card in a six-month period, although the bank insists this doesn't always apply.
Lee-Browne admits that there are some credit cards that offer "good terms" when you spend on them, but argues that the interest payments if you don't pay off the outstanding balance in full at the end of the month negates the benefits. "Don't be fooled by no charges," adds Weisz. "The exchange rate will most likely be awful."
For large amounts of money, the exchange rate on offer is even more important. For example, a 1% difference on a £100,000 transaction works out at £1,000. There are a slew of currency brokers around, with Caxton, Travelex and Moneycorp among the biggest, and the commercial rates are far more competitive than those on offer at a high-street bank.
Lee-Browne emphasises that you'll always get a "better service and a better price" with a broker. For example, a high-street bank will transfer the money immediately at an exchange rate set by them, while a broker can use a range of tools to maximise the return for the client.
To start with, a broker's exchange rate will be much more closely aligned to the actual, real-time rates and will be transparent from the outset. Most will update exchange rates as often as every 15 seconds and are able to offer currency market guidance - something which banks cannot.
One such service is the ability to set up a 'rate alert' where a broker will watch the rate with a hawk-eye and exchange the money when the rate has reached a level that the client is happy with.
"We phoned one woman in Los Angeles up at 2am once when the exchange rate had hit a certain level. She saved £22,000," recalls Lee-Browne.
It's also possible to place 'options' on currency transactions, which work like insurance contracts. For instance, one such option is to transfer £100,000 if the sterling/euro exchange rate hits 1.15 in a month"s time.
"You're agreeing an amount to transfer at a specific time and for a specific amount," says David Kerns, private client dealing manager at Moneycorp. "It's your right to take delivery of that option, but not an obligation."
It's not just buying large items where currency brokers come in handy. Hundreds of thousands of people emigrate from the UK every year. In 2009, 371,000 Britons permanently emigrated, according to figures from the Office for National Statistics. Many of these people will be drawing a pension from the UK and exchanging it into a different currency.
Most brokers offer a regular payment plan, where pensioners who retire to sunnier climes get their money delivered regularly into their foreign bank account without directly getting involved.
The process is quite straightforward, says Francis Klonowski, principal at IFA Klonowski & Co. "First, you've got to register to have your pension paid without tax in the UK. Then to arrange a transfer, simply contact an exchange specialist and arrange to have it paid into your account."
Kerns expands: "The broker will collect payment on a regular basis via direct debit then make a payment to an account overseas. We can set a contract up to be ongoing so it's indefinite, or a fixed contract for, say, six months."
Pensioners can also choose to fix an exchange rate using a "forward guarantee" for up to two years to mitigate against currency fluctuations.
Finally, Kerns warns against using high-street banks: "If you want to transfer £100,000 they'll take it and not even tell you the rate until days later," he says incredulously. "There's no negotiation on cash rates."
Still thinking of swinging by that Travelex en route to the departure gate? Thought not.
This article first appeared in the July 2011 issue of Money Observer.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
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.