Personal Finance: Money Q&A - Sterling future for your euro windfall

We want to make the most of Fr500,000 we are about to get (in euros) from the sale of our house in France. A large part of the money will be used to pay off a mortgage. The rest we could keep in a French franc/euro bank account, or we could possibly put it in European-based PEPs. Any thoughts would be welcome. We are hoping to take early retirement even though our pensions are inadequate.

MK, LONDON

It seems as if you are thinking of this just because you'll have money in France. That could be a mistake. Holding deposits in a foreign currency always carries the risk of currency fluctuations. Many manufacturers and others are desperately hoping for a fall in the pound against the euro, and this does seem quite possible. But you cannot rule out a rise in the pound, which would cost you dearly.

If you had a spare pounds 50,000 to deposit, would you seriously consider putting it into a euro account - or a dollar account for that matter? Some people would be happy to take such a risk, and it could be a reasonable one to take within a balanced portfolio of investments. But for others it would be wrong. If you're a UK resident doing all or most of your transactions in sterling, you should think in sterling. The fact that you happen to have some euros coming your way is not material. Look at your overall financial needs and goals.

Likewise, go back to first principles before deciding whether to put your money into "European-based" PEPs. Actually, all PEPs are "UK-based" insofar as they are a UK tax perk for UK residents and they require cash subscriptions in pounds. You would have to convert your francs/euros into pounds to invest in a PEP. You could then choose an investment fund specialising in European companies if it were appropriate.

For the record, money invested five years ago in the rest of Europe has done well. Seventeen of the top 20 unit trust PEPs over five years have invested in other parts of Europe, according to the brokers Chase de Vere.

However, some pundits would see that as a good reason not to invest in Europe at this moment. The classic mistake of many private investors is to pile into a particular market, country, sector or individual company after it has had a good run.

It is impossible to say where you should invest this money without knowing all your circumstances and what other investments you have. But if you are planning to retire on inadequate pensions, do first consider the pros and cons of making additional voluntary contributions to your pension scheme.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or e-mail i.berwick@independent.co.uk

Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, nor can we guarantee to answer letters. We accept no legal responsibility for advice given.

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