It can be. If your UK pension is paid in pounds but your living costs are in dirhams, euros or Australian dollars, the amount you can spend will move with exchange rates. The broad position in 2026/27 is that a fall in sterling cuts your income in local terms and a rise increases it, and how much this matters depends on how much of your retirement income is in sterling and whether you expect to return to the UK.

Where the risk comes from

Most UK pensions are valued and paid in pounds. That includes:

  • the UK State Pension, which GOV.UK says is usually converted into local currency when paid to an overseas account, so the amount you receive changes with the exchange rate
  • final salary pensions, which pay a sterling income with any annual increases
  • personal pensions and SIPPs, where the fund value is reported in sterling, even if some underlying investments are in other currencies

If you retire to the UAE, the dirham has long been pegged to the US dollar, so your exposure is broadly sterling against the dollar. In Spain or Portugal it is sterling against the euro. In Australia it is sterling against the Australian dollar.

When it matters most

Currency risk is not always a problem. It may matter more if:

  • most of your income will come from sterling sources
  • your spending is mainly fixed local costs such as rent, school fees or healthcare
  • you are drawing a regular income, so you convert at whatever the rate is
  • you have no plan to return to the UK

It may matter less if you expect to come back to the UK, have other assets in your spending currency, or have flexibility over when you convert money.

Ways people manage it

Options vary depending on your circumstances and the type of pension. They can include:

  • Matching assets to spending. Holding some savings or investments in the currency you will spend can balance sterling income.
  • Investment mix within the pension. Many UK pensions allow global investments. The fund is still reported in sterling, but the underlying exposure can be broader.
  • Timing withdrawals. With flexible drawdown, you may be able to choose when to take money, depending on your provider. Taking taxable income from a defined contribution pension through flexi-access drawdown generally triggers the Money Purchase Annual Allowance, which limits tax-relieved contributions to money purchase pensions to £10,000 a year.
  • Building a cash buffer. Keeping some spending money in local currency reduces the need to convert at short notice.
  • Comparing conversion routes. Banks and currency services can apply very different exchange rates to pension income.

Some people consider moving a pension overseas to change its currency. For transfers requested on or after 30 October 2024, a 25% Overseas Transfer Charge generally applies unless an exclusion is met, such as living in the same country as the receiving QROPS or it being your employer's scheme. The outcome depends on your residence, the scheme's status and whether the exclusion continues for five years. See our Overseas Transfer Allowance guide.

A worked example

Illustrative example only, not a real client.

Anne retires to Portugal with a sterling pension income of £30,000 a year. Ignoring tax, conversion costs and any pension increases:

  • At €1.20 to the pound, that converts to €36,000.
  • If sterling falls to €1.10, the same pension converts to €33,000, €3,000 a year less.
  • If sterling rises to €1.30, it converts to €39,000, €3,000 a year more.

Her pension has not changed in pounds, but her spending power has moved by €3,000 either way. These rates are hypothetical and are not a forecast.

Tax as well as currency

Exchange rates are only part of the picture. Where your pension is taxed depends on your country of residence and any double tax treaty. Under Article 17 of the UK and UAE treaty, for example, pensions paid to a UAE resident are generally taxable only in the UAE, subject to meeting the treaty's residence test. Our guide to drawing a UK pension abroad explains how UK tax deduction may be stopped where a treaty allows.

Common mistakes

  • Planning retirement income in sterling without converting it to local costs.
  • Converting large sums in one go without comparing rates.
  • Transferring a pension overseas for currency reasons without counting a possible 25% charge.
  • Overlooking that in the UAE the real exposure is broadly sterling against the dollar.

A regulated financial adviser can help. Get in touch for a free introduction.

Sources and further reading

Last reviewed: October 2026. Tax year: 2026/27 (UK); current UAE rules. Jurisdictions covered: UK, UAE. Rates, legislation and guidance change, so recheck before relying on this. Rules can differ between England and Wales, Scotland and Northern Ireland; tax residence is fact-specific; treaty outcomes depend on residence, domicile or nationality provisions; examples are simplified and omit reliefs, costs, exchange rates and anti-avoidance rules. This is general information, not financial, tax or legal advice. Take advice in the relevant country before acting.