How do currency movements affect your overseas investments?
A UK investor holding a global equity fund owns mostly foreign-currency assets, so the return in sterling depends on exchange rates as well as on markets. Over long periods that has helped more than it has hurt, and in retirement — when spending is in pounds — it becomes a risk that deserves a decision rather than a default.
- The exposure: a global equity fund is largely unhedged foreign currency.
- The effect: sterling weakness raises returns in pounds; strength reduces them.
- Equities: usually left unhedged, because currency moves are small next to equity moves.
- Bonds: usually hedged, because currency moves are large next to bond returns.
01 What you actually own
A global equity tracker holds companies listed all over the world, and its value in sterling is the value of those holdings translated at the exchange rate on the day. A fall in sterling raises the fund's price in pounds even if no share price moved.
That has flattered UK investors during periods of sterling weakness and worked against them during recoveries. It is a source of return volatility rather than a source of return: over the long run currency movements average out and are not compensated.
The exposure is unhedged unless the fund says otherwise. A hedged share class exists for many funds and costs slightly more, which is the choice being made by default when nobody chooses.
Shows: the effect of a currency move on the sterling value of an overseas holding. Ignores: the underlying market return, hedging costs, and any correlation between the two.
On the defaults above, the worked example shows £-15,000. A 10% move in sterling changes the value by £15,000 with no change in the underlying markets at all.
Source: FCA consumer information
02 Why equities and bonds differ
Equity markets move much more than currencies do, so currency movement is a modest addition to an already volatile asset. Hedging it removes some volatility and adds cost, and most evidence finds the case finely balanced for a long-horizon equity holding.
Bonds are the opposite. A global bond fund's expected return is small enough that unhedged currency movement dominates it entirely — the currency swing can be several times the yield. That is why hedged share classes are the norm for international bond exposure.
The practical rule that follows is simple: leave equities unhedged, hold international bonds hedged to sterling, and do not treat the two decisions as one.
Source: Bank Rate and how it works
03 What changes in retirement
In accumulation, currency volatility is noise absorbed by a long horizon. In drawdown, a fall in sterling terms means selling more units to produce the same income, which is the same mechanism that makes a market fall permanent.
That argues for the near-term withdrawal money being in sterling rather than exposed, which a cash buffer achieves automatically. The long-term portfolio can carry the exposure because it has time.
For anyone planning to retire abroad the calculation reverses: spending in euros against a sterling-denominated portfolio is an unhedged currency position in the other direction, and it is a much larger exposure than most people realise.
Two different decisions get treated as one. For equities, currency movement is small next to how much the market itself moves, and leaving it unhedged is a defensible default. For international bonds it is the opposite — the currency swing can be several times the yield you are buying, which is why hedged share classes exist and why holding unhedged global bonds is mostly a currency bet with a coupon attached. Check what your bond fund is doing. And if you plan to retire abroad, notice that you have taken the same bet in the other direction, on a much larger scale.
FAQ
Should I hedge my global equity fund?
The case is finely balanced and unhedged is a defensible default. Currency movement is modest next to equity market volatility over a long horizon, and hedging adds cost.
What about international bonds?
Hedge them. A global bond fund's expected return is small enough that unhedged currency movement dominates it, so the currency swing can be several times the yield you are being paid.
Does it matter more in retirement?
Yes, for the money funding near-term withdrawals, because a fall in sterling terms means selling more units for the same income. A cash buffer in sterling addresses that; the long-term portfolio can carry the exposure.
Sources
Regulator references
- FCA consumer information · Financial Conduct Authority · 2025The regulator's own consumer guidance on the products discussed here.Last verified: 2026-09-07
- Bank Rate and how it works · Bank of England · 2025The policy rate that drives the mortgage and cash comparisons here.Last verified: 2026-09-07
- Tax on your UK income if you live abroad · GOV.UK · 2025How UK-source pension income is taxed once residence changes.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.