As Martin Stewart, Managing Director of Siddalls, the Anglo-French financial advisers, points out, there is much to be achieved with good financial planning at the bottom of the market.

Over the last 10 years the value of Sterling against the Euro has fluctuated by over 40% and the current value is approximately the same as the old French Franc/Sterling rate, when the UK left the former exchange rate mechanism in 1991. Economists are currently forecasting anything between parity with the Euro to a 20% increase in Sterling this year and if the economists cannot agree, then the conclusion must be that currency stability in 2009 is unlikely.  In the future, with no political desire in the UK to enter the Euro Zone, huge variations in the value of Sterling will continue to be a fact of life for all of us.

The value of Sterling does not have to be something that keeps you awake at night. With good financial planning you can significantly reduce or even eliminate this problem from your day to day finances. 

Our discussions with many British residents of France have shown a tendency to wish to avoid exchanging Sterling at all costs at the present time, even to the extent of no longer living comfortably in France, while considerable sums build up in a UK bank account.

As Martin Stewart, Managing Director of Siddalls, the Anglo-French financial advisers, points out, there is much to be achieved with good financial planning at the bottom of the market.

1. Continue to invest in Euros

Investing in the currency of your spending is the only way to eliminate currency risk. Even now, any decision to leave capital in Sterling is a risk, since the exchange rate can obviously move in both directions. 

Leaving your money in the UK is rarely the best solution from a French tax perspective and with interest rates now lower in the UK than the rest of Europe, gross returns from UK deposit accounts are not looking as attractive as they were.  Once you factor in French taxes, net returns can be less than inflation, resulting in your money losing value.

Our advice is, have a plan to invest in Euros and stick to the plan, since once you have converted your capital, you can forget about exchange rates.

2. Invest in Sterling but utilise a French approved investment product

For those of you who cannot accept the idea of exchanging Sterling at the current rate, it is now possible to leave your money in Sterling and place it within an investment which is suitable for France. You can therefore solve any tax and inheritance problems, while providing the option to convert your capital to Euros at a later date, within the same investment, with no extra costs or tax charge.

Your money can be invested in Sterling with some of the most secure banks and insurance companies in the world and still enjoy French tax benefits. 

3. Convert Sterling gradually over time

Investing in Sterling still means that you have the dilemma of when to exchange in the future. A basic technique of financial planning is “pound cost averaging”, which basically means that you exchange a small amount every month, for a year. You then know that you will automatically receive on the entire amount the average exchange rate over that year. Obviously, this does not eliminate the risk of the exchange rate going against you but reduces the risk of exchanging a considerable sum at the worst time.

French investment products are now available which allow you to invest in Sterling and establish a small, no-cost, transfer into Euros every month, for a chosen period of time.

4. Reassess your pension fund

For many people, their pension fund is the biggest Sterling asset and one of their key objectives is to remove the fluctuation in its value against the Euro.  If you have not yet purchased an annuity with your pension fund, there is much that can be done to create a structure that allows you to invest in Sterling or Euros, have your pension paid in Euros and modify your strategy at any time.

5. Raise a loan against your investments

Certain types of French investment product allow you the automatic right to a  bridging loan, up to a certain percentage of your capital. The loans are normally for a maximum period of 3 years. The interest rates vary, but are generally around 1% over the average government bond interest rate, or just over 5% at present.

For people, who have short term capital needs but have no wish to exchange Sterling, it has been possible for them to use their Sterling investments to borrow Euros, to meet their immediate needs, with the aim that the loan will be repaid out of the investment proceeds, when they feel able to exchange Sterling for Euros.

This obviously increases the currency risk, since, if Sterling were to fall, the cost of repaying the loan would increase proportionately and could even lead to ‘negative equity’, so it is not a solution we would recommend. However, it is a facility that exists, for those who understand the risk they are taking.

6. Sell Euros and buy Sterling

Finally, for the experienced investor, it is perfectly possible to take a risk on the currency markets within your investments. If you already have significant Euro investments and you believe Sterling is more likely to rise than fall, you could consider selling part of your Euro assets to buy Sterling.  The bullish investor is forecasting a gain of 20%+ but this does bring with it large risks.

For those of you intending to return to the UK at some point in the future, if you believe Sterling is at its low point, then it may be a good time to start buying and with the correct French investment products you can do this without losing French tax benefits.

The key to good financial planning, is know what options are open to you to combat currency exchange risk and then have a strategy in place.