The Bank of England has finally raised the interest rate from 0.5%, set almost a decade ago, to 0.75% on August 2 – but this news should be received with a cautious outlook, noting that the likelihood of further increases will largely depend on how the economy fares for the rest of this year and in the run-up to Brexit. If there is a marked slowdown, then it is likely that rates will stall again. Even worse, a recession would most likely see a further interest rate cut.
So, what does the interest rate rise mean for expats in Portugal?
Drawing your income
The interest rate change caused only a minor fluctuation for the pound against the euro. However, expats drawing income in sterling should remain aware of fluctuations in the future because increased exchange rate volatility is likely as we inch towards Brexit.
Now might be the perfect time to consider changing the way your pensions and investments are structured – diversification can be key to mitigating concentration risk when thinking about currency exchange rates.
Firstly, and we emphasise this strongly, always think very carefully before reacting to interest rate and other market changes. Higher interest rates may mean a boost for anyone with or seeking an annuity in the current climate as the higher interest rate should see gilt yields rising and, therefore, annuity income could reflect this. But it’s unlikely to be an instantaneous change.
If you are considering a transfer to a final salary pension, you may find that transfer values fall, but there is much to evaluate when deciding what to do with your pension pot. The one piece of advice we give to every retiree and retirement saver is to seek regulated, personalised pensions advice before making any radical changes to your pension savings.
There is no one-size-fits-all approach to retirement investing and pension transfers. A fluctuating interest rate is just one of many factors which will affect the most appropriate approach to your retirement savings.
Cash savers with funds in UK accounts will depend on their bank or building society’s decisions whether or not to pass the increase on, and many commentators, including Mark Hollingsworth, believe that, first and foremost, financial institutions will use the new base rate to bolster their own revenue before passing on the benefits to customers.
Further, the 0.25% interest rate rise will do little to stop the erosion of savings when inflation is factored in. By now, long-term savers should understand that while banks offer a relatively low-risk option for their hard-earned money, they are unlikely to offer the growth that most people need to fund the retirement lifestyle that they want.
If you are an expat in Portugal who owns UK property and you are on a fixed-rate mortgage deal, there will be no immediate increase in your payments. However, tracker mortgages will increase.
For example, if you have a £200,000 repayment mortgage, the 0.25% increase means your payments will increase by £25 a month. And we should also look at the possibility of future increases – if that same £200,000 mortgage is subject to a 1.5% increase (BMR 4%), it will go up from the original £897 per month (pre-August rise) up to £1,055 per month.
Review your outlook
Understanding your wealth and assets is key to making the right investments for the future. Putting all your money solely into an annuity, real-estate or bank savings accounts is unlikely to offer the best returns over the longer-term.
This is not scaremongering; it is a cold, hard fact that has been proven historically over many decades. When thinking about your money, you should think diversely, and for truly diversified investing you may well need the help, advice and support of a financial adviser.
As an expat in Portugal, getting advice from professionals who have years of experience in the country is a really positive step. And that’s where Blacktower can help. Contact us today for a friendly review of your finances, so we can help you make the most of the current financial climate.
ADVICE FROM BLACKTOWER
The Blacktower Group was formed in 1986 and has earned its reputation providing wealth and management and pensions planning advice to clients in the UK as well as those who are resident abroad. Our proven and bespoke service can help you accomplish your financial goals. With an office in the Algarve and Cascais and representatives servicing expats all over Portugal and Madeira, we can help you today by calling 289 355 685 or 214 648 220, email email@example.com or visit www.blacktowerfm.com
By Manuela Robinson
Manuela Robinson is the Joint-Country Manager of Blacktower in Portugal. With offices in Quinta do Lago, Cascais and representation in Madeira.
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Blacktower Financial Management (International) Limited is licensed by the Gibraltar Financial Services Commission. Licence 00805B. Blacktower Financial Management Limited is authorised and regulated in the UK by the Financial Conduct Authority.