Warning to South Africans getting their pension from outside sources
Currency experts are urging pensioners to compare the exchange rates for their foreign pension payments against the mid-market rate and consider alternative providers to avoid losing money.
Many retirees in South Africa receive monthly pensions in foreign currencies that must be converted into the local currency to cover living expenses.
These pensioners may have worked abroad or accrued private pensions overseas.
The CEO of foreign exchange company Future Forex said that these funds are converted to cover costs such as rent and groceries.
The final amount received is influenced by currency fluctuations and the bank’s conversion rate.
Banks typically don’t charge visible fees; instead, they incorporate their margins into the exchange rate, creating a hidden cost known as the spread.
The true cost of currency conversion becomes evident only when comparing the received amount to the market rate.
Harry Scherzer, CEO of Future Forex, explained that for pensioners, the final rand payout is influenced by currency market movements, which are beyond anyone’s control, as well as by the bank’s conversion rate, which is a controllable factor.
“Dividing the rand amount received by the foreign amount sent, and comparing that figure to the mid-market rate for the same day, shows the gap between the reference rate and the rate applied,” said Scherzer.
“That gap is known as the spread, the margin a bank or forex provider builds into the rate itself rather than charging as a separate, visible fee,” he said.
“The pension arrives, it looks like a fixed monthly amount, and the spread inside that conversion is invisible unless someone goes looking for it.”
Overseas pension schemes vary in how they handle currency conversions.
For example, the UK State Pension for retirees living outside the European Economic Area, Switzerland, Gibraltar, or countries with specific reciprocal agreements remains fixed at the same amount in foreign currency indefinitely, meaning it does not increase each year.
In contrast, many pension schemes from the US, Europe, and Australia do provide periodic increases in their home currency.
Regardless of the scheme, once the foreign amount is established, the exchange rate applied during conversion ultimately determines whether a pensioner’s income in rand remains stable, increases, or decreases from one year to the next.
Experts urge pensioners to shop around
Since a pension is a recurring monthly income over a 10- to 20-year retirement, losing a small percentage on each conversion adds up to tens of thousands of rands in hidden losses over time.
“Take a pension paid at a fixed foreign amount each month, worth roughly R47,000 at a market-reflective rate. At a rate with a wider margin built in, the same payment might convert to closer to R45,900.
“That gap of around R1,100 a month adds up to more than R13,000 a year, quietly, without ever showing up as a deduction anywhere.”
Scherzer explained that a slight difference in an interest rate for one month may go unnoticed.
However, when that difference is applied to twelve payments each year over a period of ten or twenty years in retirement, it can become one of the largest expenses in a person’s financial life without them even realising it.
He said that most retirees receive their payments through traditional banks, which the World Bank identifies as the most expensive method of transfer worldwide.
“The World Bank’s most recent tracking shows banks remain the most expensive channel for moving money internationally, averaging a cost of 14.55%, against a global average of 6.49% across all provider types.”
He said that Sub-Saharan Africa is the most expensive region to receive money into at 8.78%.
Scherzer urged retirees to treat exchange rate conversions like any other major financial product, such as medical aid or car insurance, by comparing providers and demanding to see the live mid-market rate alongside the offered rate.
“Retirees rarely renegotiate their car insurance or medical aid without shopping around, yet many never apply the same scrutiny to the rate applied to their single largest recurring source of income.”
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