Italy's gold 'worth only a tenth of bailout it needs'

The Italian central bank’s gold holdings are worth about one tenth of the total bailout the country requires, according to October data from the World Gold Council.

The gold price is currently at about $1,764 per troy ounce Photo: Bloomberg News

By Garry White

12:59PM GMT 10 Nov 2011

Italy holds 2,451.8 tonnes of gold – the third highest of any central bank in the world. Only the US, with 8,133.5 tonnes and Germany, with 3.401 tonnes holds more. The International Monetary fund also has reserves of 2,814 tonnes.

One tonne is the equivalent of 32,150.75 Troy ounces. The gold price is currently at about $1,764 per troy ounce, so one tonne of gold is worth about $57.6m. This means Italy’s total central bank holdings are worth around $141bn (£88.6bn).

According to Gary Jenkins, a fixed income analyst at Evolution Securities, Italy requires $1.4 trillion to fully cover its bail out.

This means Italy’s gold holdings are worth about one-tenth of the estimated total amount required.

The cost of repaying Italy’s debt by 2013 is expected to hit £424.9bn, with the country’s total debt currently standing at about $1.9 trillion.

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“China wants gold. Would a gold-for-euro trade make sense?” Douglas Borthwick, managing director of foreign exchange dealer Faros Trading, said. “Italy can repay its debt, but it would need to sell its gold to do so.”

The Portuguese Central Bank holds 382.5 tonnes of gold, while the Spanish central bank has 281.6m tonnes of the precious metal.

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8881119/Italys-gold-worth-only-a-tenth-of-bailout-it-needs.html

S&P has no choice: Euroland risks bankruptcy on current policies

By Ambrose Evans-Pritchard Economics Last updated: December 6th, 2011

Standard & Poor's dropped a bombshell at the right moment (Photo: AFP)

Very quickly, Standard & Poor’s is of course right.

The immediate eurozone crisis cannot be solved by punishment measures alone. There needs to be some form of joint debt issuance and a lender of last resort to halt "systemic stress".

It was well-timed to drop this bombshell on Monday night after the Merkozy fudge (though S&P made the decision earlier), since the duumvirate yet again failed to offer any meaningful way out of the impasse.

"Policymakers appear to have acted only in response to mounting market pressures, rather than pro-actively leading market expectations in a way that might have better supported and strengthened investor confidence. We take the view that the defensive and piecemeal nature of this response has helped expand the crisis of confidence in the eurozone."

Spot on.

IMF chief Christine Lagarde was equally dismissive of the Merkozy plan. "It’s not in itself sufficient and a lot more will be needed for the overall situation to be properly addressed and for confidence to return."

As S&P states, a credit crunch is taking hold, partly because of the EU’s pro-cyclical demands for higher capital ratios. Euroland’s incoherent mix of policies are pushing the eurozone into recession and therefore into deeper debt stress.

"As the European economy slows, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, eroding the revenue side of national budgets."

 There has of course been consternation in Germany, usually based on a misunderstanding of how rating agencies operate. They measure default risk, therefore members of a fixed currency union are inherently more risky.

 The US and the UK have used QE to inflate away some of the debt, and they have weakened currencies to act as a shock absorber. This is undoubtedly a form of stealth default, but that is not what S&P measures. It deals only with "credit events", and such an event is less likely for countries with a sovereign currency and central bank that can inflate (provided their debts are in their own currency).

Furthermore, shrieking Europols commit the fallacy of comparing levels of public debt and deficit levels with the US. That evades the core problem, that the eurozone’s banking nexus is €23 trillion, or three times sovereign debt. This has become a contingent liability of the governments themselves, especially the AAA core.

"For countries in net external liability positions, including the eurozone’s peripheral economies, we see growing risks to the funding of their external requirements. In our view, financial institutions located in countries in net external asset positions (such as Germany) also face pressure where the quality of those assets is deteriorating. Deleveraging by European banks is intensifying, as they reduce their balance sheets amid worsening funding conditions, look to bolster their capital ratios, and address concerns about deteriorating asset quality among their borrowers. By our estimates, a sample of 53 large eurozone banks from 12 countries will face bond market maturities of an historic record of over 205 billion euro in the first quarter of 2012."

I might add that EMU banks have a loan-to-deposit ratio of almost 1.2 (like Japan before the Nikkei bubble burst), compared to 0.7 in the US. They are much larger in aggregate, much more leveraged, and mostly underwater already on EMU bonds if forced to mark to market. In essence, the whole eurozone is already insolvent. Face up to it.

(Yes, yes, before you all scream over there, Britain is insolvent too by the same yardstick. That is why it is useful to have the magical instrument of a sovereign central bank in such circumstances – and one willing to act – to conjure away the awful truth.)

Euroland’s crisis is not about Greek pensions or Italian labour laws, but about a vast and catastrophically ill-designed edifice of interlocking bank debt and sovereign debt.

You cannot separate the two. The sovereigns are destroying banks, and the banks in turn are destroying sovereigns. The two disasters are feeding on each other. This will continue until there is a circuit-breaker, both to act as lender of last resort and to end the slump.

S&P does not pull its punches on this:

"We will analyze the policy settings of the ECB to address the economic and financial stresses now being experienced by eurozone sovereigns. In particular, we will examine the potential impact these policy settings will have in both staunching the eurozone’s increasing output gap and ameliorating its currently dislocated debt markets."

 In other words, Europe has been told that the ECB’s contractionary policies – if continued – will lead to downgrades. The agency is targeting the output gap.

The Europeans are entitled to ignore this as – in their view – the worst sort of New Keynesian and Anglo-Saxon muddled thinking. Fine, but you can hardly complain if you lose your AAAs from an Anglo-Saxon New Keynesian agency.

Take it on the chin, defy the world, and pursue your 1930s policies if you wish.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013647/sp-has-no-choice-euroland-risks-bankruptcy-on-currrent-policies/

Markets a challenge for investors

Lesley Parker
November 16, 2011



Danger zones ... with warning signs at every turn, fear is influencing investors' choices. Illustration: Nic Walker


After four major crises in the past decade, concerns are mounting over the best way to invest for retirement.

If you want an illustration of how difficult the environment has become for share investors, consider the fact that US stocks have now underperformed bonds not just in the short term but in the past 30 years, which is something they haven't done in any other 30-year period since the start of the American Civil War. That's right - since 1861.

The global chief investment officer for asset management and private banking at Credit Suisse, Stefan Keitel, who visited Australia this month, says that has placed a question mark against the equities culture in countries such as the US and Australia, which have a tradition of share ownership.

''In equity-friendly regions - as, for example, the US - people now have far more doubts whether they really should go for pure equity investing when it comes to retirement planning,'' the Zurich-based Keitel says.

''If you look back at the behaviour of US investors, their whole retirement was planned on equity investing. After having experienced four major crises over the last decade, now the doubts are rising if that's the right strategy.''

Australians have also had a love affair with equities. In 2004, 55 per cent of the population owned shares, according to the annual share ownership survey by the Australian Securities Exchange, putting them on a par with Americans. That rate slid to 36per cent amid the global financial crisis in 2008 but recovered to 43 per cent last year. This year's InvestSMART Funds Flow Survey, the online discount fund brokers owned by Fairfax Media, found that the huge volatility in global sharemarkets had indeed sent many local investors to the sidelines or into more conservative asset classes (see story below).

Asked whether the Wharton School study of the long-term return from shares versus bonds refuted portfolio theory that there's an ''equities risk premium'' - extra return for taking on a riskier asset - Keitel says the result is ''pretty interesting'' but not surprising.

''Especially the last 11 years have been anything but good for the equity investor, given the different crises scenarios we have already had,'' he says. ''[But] what has been now the result for the past 10, 11 and maybe, on average, the last 30 years must not necessarily be the result for the next 30 years.''

In other words, as Australian investors are reminded in every product disclosure statement, past performance is no predictor of future performance.

''We think the phase of outperformance of bonds against equities will definitely come to an end,'' Keitel says. ''It will not be a sharp trend reversal … equity markets will stay volatile but I think when you compare these two asset classes, given the valuations behind them, we think that equity markets are better underpinned.

''So portfolio theory will come back and also the risk premium will come back. But … it will take time - mean reversion always takes time.''

Keitel used the word fear to describe the attitude of some investors to equities these days, amid enormous volatility in sharemarkets as stock prices plummet at the first hint of bad news and soar in response to any reassurance.

''I think we are living in a more trading-oriented world and maybe the capital markets in general have become a bit more unserious, '' Keitel says.

Just as markets focused too much on the negative in July, August and September, they were perhaps too positive during the counter-rally, he says. That in turn preceded another slump as Greece prevaricated over its debt crisis.

''Investing disciplines are much more short-term oriented than they have been in the past,'' Keitel says, making markets more challenging places for smaller investors. ''It's getting more and more complex [for the ordinary investor] because the cycles are getting more and more short-lived,'' he says. ''That complexity, I think, is of course for many investor types not a good thing and, of course, also limits down the willingness to invest in these markets.''

But from Credit Suisse's point of view, that only means there's a strong need for guidance from advisers such as itself, he says. ''It's different if you're in a market cycle like 1982 to 2000, where everybody could make money without having any intellectual competence.''

Keitel expects ''the next weeks, months and years will be anything but boring. It will stay extremely challenging in the capital markets and it will also stay challenging when we talk about … the equities side.''

Key risks include below-trend economic growth - but not recession - in major nations, inflation in nations such as China and any escalation of the sovereign debt crisis.

On the positive side, there's what he calls ''the experience factor''. ''All central bankers and politicians now are pretty aware what contagion means,'' he says.

Markets have already priced in most of the apparent risks. Also, investors can't afford to stay in cash forever, especially with low or falling interest rates.

''So despite a broad bundle of risks, we also have a broad bundle of supporting elements,'' Keitel says.

What that means in practice depends on an investor's risk profile, he says.

People with long-term horizons might take setbacks as buying opportunities, while those with shorter-term horizons, who don't have time to recover from losses, could use rebound rallies to move more money to the sideline.

There's numbers in safety

Do Australian investors, like Americans, increasingly fear equities?

The annual InvestSMART Funds Flow Survey released last week found that sharemarket volatility has sent many Australian investors onto the sidelines or into more conservative asset classes in the past two years.

The survey of 1540 "self-directed" investors using the online discount fund broker's service found there was a 19 per cent decrease in share holdings between 2009 and this year but also a 35 per cent fall in cash holdings. Fixed interest was a significant benefactor (up 85 per cent), along with property holdings (up 37 per cent).

There was a 110 per cent increase on last year in the number of respondents who rated the current market as bearish.

Another indicator might be how much money is being kept in cash by self-managed super fund trustees.

Researcher Investment Trends, as part of its annual SMSF Investor Report, found that total cash held by SMSFs grew by $40 billion between the publication of its reports in May 2009 and this year, an increase of 54 per cent.

Key points


❏ US stocks have now underperformed bonds over the long term.


❏ Credit Suisse is expecting the ''equities premium'' to return, however.


❏ Continued market volatility is also scaring off some investors.


❏ Volatility is expected to remain for some time.


❏ Investment cycles are increasingly short-lived.




Read more: http://www.smh.com.au/money/investing/markets-a-challenge-for-investors-20111115-1nfxs.html#ixzz1fzScbt46

An entree to emerging markets

Reward for risk

Investors are being rewarded for the risk they are taking by investing in emerging markets, not for higher economic growth, Sauter says.

And, as the risks of investing in emerging markets are high, the long-term returns should be high.

Some of these risks are well known. Many companies in emerging markets are under family control. Their interests may not be aligned with those of minority shareholders and corporate governance standards can be low.

However, the risks of investing in Asia, in particular, are fewer than they used to be as the countries continue to develop, says Kerry Series, the chief investment officer of Eight Investment Partners, which specialises in the Asia-Pacific region.

''Emerging markets are still volatile but investors just have to put up with volatility if they invest in these markets,'' Series says, adding that emerging markets are still peripheral for global investors.

When there is investor nervousness, they withdraw their money from emerging markets first.

However, the volatility creates opportunities for astute fund managers, Series says.

While the link between economic growth and sharemarket performance cannot be established, robust economic growth is certainly not bad for share prices. Series says the fact the big developed countries will be growing slowly will likely mean more investor funds will be going into Asian shares, moving Asian share valuations from less than their true worth to a premium in the next several years.

Still, concerns persist, particularly regarding China, the biggest emerging market. Higher interest rates to subdue inflation have led to a credit crunch, squeezing property developers and slowing exports as a result of slower global growth, the chief economist at AMP Capital Investors, Shane Oliver, says.

Nevertheless, export growth in developing Asia, overall, has proved remarkably resilient, the portfolio manager of the Fidelity Asia Fund, David Urquhart, says.

Although Asia is certainly not immune to a slowdown in the West, the region's economy is significantly less reliant on exports to the West than many investors realise, he says. More than half of Asian exports are now traded within Asia or other emerging markets, which has meant export growth has remained resilient, even as growth in the West has slowed this year, Urquhart says.

Read more: http://www.smh.com.au/money/investing/an-entree-to-emerging-markets-20111111-1nbgy.html#ixzz1fzRPsnfO

ECB cuts rates but downplays crisis help

December 9, 2011 - 6:04AM

The European Central Bank acted to soften a looming recession and avert a credit crunch by cutting interest rates and offering banks long-term funds on Thursday but spooked markets by dousing hopes of dramatic crisis-fighting action in the euro area.

ECB President Mario Draghi discouraged expectations that the bank would massively step up buying of government bonds if European Union leaders, gathering in Brussels for a crucial summit, agree on moves towards closer fiscal union.

He said the euro zone's rescue fund should remain the main tool to fight bond market contagion, despite its clear limits, and said it was illegal for the ECB or national central banks to lend money to the IMF to buy euro zone bonds, appearing to veto one firefighting option under active consideration.

To counter that, Draghi announced unprecedented action to support Europe's cash-starved banks with three-year liquidity and cut interest rates back to a record low 1.0 percent.

The euro and European shares dived as markets, increasingly convinced that only the ECB has the power to protect the euro zone, focused on what Draghi was cool about rather than the measures he announced.

"One step forward, two steps back," said Alan Clarke, UK and euro zone economist at Scotia Capital. "The euro zone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."

The ECB cut its main rate by a quarter-point and flagged a strong chance of recession next year. Draghi admitted the central bankers had been divided even on that decision.

"The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks," he told a news conference.

French President Nicolas Sarkozy dramatised the danger facing the 17-nation single currency area hours before their eighth crisis summit of the year in a speech to European conservative leaders in the French port city of Marseille.


"Never has the risk of Europe exploding been so big," he told leaders including German Chancellor Angela Merkel and the heads of the EU institutions.

"The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence," the French leader said. "If there is no deal on Friday, there will be no second chance."

France and Germany used the Marseille meeting to lobby for their plan to amend the European Union treaty to toughen budget discipline, which they want to have ready by March. But several countries are sceptical of full-blown treaty change.

German Chancellor Angela Merkel said she was convinced leaders would find a solution to the euro crisis at the summit.

The new ECB chief said his remark last week that "other measures" might follow if euro zone leaders agreed to seal tougher new budget rules had been overinterpreted as hinting the bank could step up bond purchases.

"I was surprised by the implicit meaning that was given," Draghi said, without offering an alternative interpretation.

The plight of Europe's banks was thrown into sharp relief. Two financial sources told Reuters that watchdog the European Banking Authority had told them to increase their capital by a total of 114.7 billion euros, significantly more than predicted two months ago.

A Reuters poll of economists found that while 33 out of 57 believe the euro zone will probably survive in its current form, 38 of those questioned expect this week's summit will fail to deliver a decisive solution to the debt crisis.

DIVISIONS

Euro zone officials said the summit was likely to decide to bring forward the launch date of a permanent bailout fund to 2012 from mid-2013. Before Draghi spoke, one euro zone source said negotiators were close to agreement for their central banks to lend 150 billion euros to the IMF for firefighting.

However, a proposal to give the permanent European Stability Mechanism a banking licence with access to ECB funding was "off the table" due to German opposition.

The EU remains divided over the need for treaty change. Summit chairman Herman Van Rompuy is urging leaders to avoid a laborious full overhaul that could take up to two years and face uncertain ratification. He wants them instead to slip stricter budget enforcement through in a protocol to existing treaties.

This infuriated Merkel and was one reason behind a gloomy briefing by a senior German official on Wednesday, who dampened hopes for a breakthrough and said some leaders and institutions still didn't understand the severity of the crisis.

If all 27 EU states do not support more fiscal union by adapting the existing Lisbon treaty, which took eight years to negotiate, then Sarkozy and Merkel want the 17 euro zone countries to go ahead alone with more integration.

"Should it turn out that not all 27 are able to go down this path, then we have to make a treaty change for the 17 euro states," said Luxembourg premier Jean-Claude Juncker, who chairs the grouping of euro zone finance ministers. "I don't want this but I don't exclude it."

Swedish Prime Minister Fredrik Reinfeldt, speaking for a non-euro state, said: "We want to stick with the 27 concept of course because all of us are members of the European Union and we want to have our influence. We want to keep the European project together."

The Franco-German plan would slap automatic penalties on countries that overshoot deficit targets and make countries anchor a balanced budget rule in their constitutions. The sanctions could be stopped only if three quarters of euro zone countries are against them.

Not all euro zone countries are comfortable with all the French and German proposals, with Finland opposed to their call for majority votes on major policy decisions.

U.S. Treasury Secretary Timothy Geithner, ending a visit to Europe to urge decisive action with talks with new Italian Prime Minister Mario Monti, said it was essential for European leaders to strengthen their financial firewall to give economic reforms a chance to work.

Monti is pushing through economic reforms after the euro zone's third biggest economy found itself sucked to the centre of the debt crisis.

In one glimmer of positive news for stressed euro zone countries, two big financial clearing houses cut the cost of using Italian bonds to raise funds following some easing in the country's bond yields.

Reuters



Read more: http://www.smh.com.au/business/world-business/ecb-cuts-rates-but-downplays-crisis-help-20111209-1olyh.html#ixzz1fzJNGtpk

US stocks fall on Europe woes

December 9, 2011 - 9:01AM
UPDATE

Wall Street fell after the European Central Bank dashed hopes that policy-makers were preparing a financial "bazooka" to contain the debt crisis, and Germany rejected some proposals to add power to the euro zone's bailout fund.

US markets have been on edge all week in anticipation of a summit deal that would come to grips with the euro zone's growing debt crisis, and pave the way for greater action by the ECB to hold down bond yields.

But actions from Europe - both early and late in the day - were a stark disappointment.

Before the market's open, ECB President Mario Draghi discouraged expectations that the central bank would massively increase its purchases of government bonds after a crucial Brussels summit on Friday.

Shortly before the closing bell, Germany rejected some measures in draft conclusions from the summit, including giving the European Stability Mechanism (ESM) a banking license and issuing common euro-zone debt. US stocks and the euro fell sharply following the news. 

"It looks like it's (the opposition) coming from Germany. That just spells more trouble ahead in the days to come," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

More than 44,500 S&P E-Mini futures contracts traded between 3:40 p.m. and 3:45 p.m., when the Germany headline appeared. This was the busiest five minutes of the day, other than the last five minutes of trading, which typically has the highest volume.

Banks slide


The S&P financial sector index was the biggest loser, falling 3.7 per cent. That followed sharp losses in European banks' shares as sources told Reuters the European Banking Authority (EBA) sees the capital shortfall at European banks at 114.7 billion euros ($154 billion).

Shares of Morgan Stanley, a barometer of risk aversion due to its perceived exposure to Europe's crisis, fell 8.4 per cent to $15.88.

The latest developments from Europe overshadowed a cut in the bloc's interest rate to a record low 1 per cent and extra liquidity provisions for banks.

The Dow Jones industrial average tumbled 198.67 points, or 1.63 per cent, to end at 11,997.70. The Standard & Poor's 500 Index fell 26.66 points, or 2.11 per cent, to 1234.35. The Nasdaq Composite Index lost 52.83 points, or 1.99 per cent, to close at 2596.38.

The decline comes after three days of gains for US stocks when the S&P 500 tried and failed to stay above its 200-day moving average, which has been a key level for investors to watch this year, and one that could prove tough to break.

But Thursday's pullback, concentrated in economically sensitive areas, was a far cry from the wild swings of recent months when uncertainty over Europe has dominated headlines. That is being seen as a sign of resilience by many investors who are hoping for seasonal strength into the end of the year.

Yields on European sovereign debt spiked. Ten-year Italian government bond yields rose 44 basis points to 6.51 per cent - the day's high. German Bund futures hit a session high of 136.89, up 109 ticks on the day.

Earlier, data showed US jobless claims fell more than expected in the latest week, a sign the labor market recovery was gaining momentum. Claims slid to a nine-month low.

Reuters



Read more: http://www.smh.com.au/business/markets/us-stocks-fall-on-europe-woes-20111209-1olzd.html#ixzz1fzHBjN8R

How to make money in a down market?

Here is an example of making money in a down market.

At the end of 2007, an investor was enthusiastic about a stock ABC.  Then the severe bear market of 2008/2009 intervened.  Here were the investor's transactions in stock ABC.

1.11.2007  Bought 1000 units  @  $6.00          Purchase value  $6,000
6.11.2007  Bought 1000 units  @ $ 6.75          Purchase value  $6,750
15.9.2009  Bought rights 800 units @ $ 2.80    Purchase value  $2,240
!5.9.2009   Bought 5,500 units  @ $ 3.51         Purchase value  19.305

Total bought 8,300 units
Purchase value  $34,295
Average price per unit $ 4.13

Current price per unit  $ 5.51
Current value of these 8,300 units is $ 45.733.

This is a total gain of $ 11,438 or total positive return of 33.4% on the invested capital, excluding dividends, received for the investing period..


Lessons:
1.  Investing is most profitable when it is business like.
2.  Stick to companies of the highest quality and management that you can trust..
3.  Stay within your circle of competence.
4.  Invest for the long term.
5.  Generally, hope to profit from the rise in the share price.
5.  At times, the share price becomes cheap for various reasons # - be brave to dollar cost average down, provided no permanent deterioration in the fundamentals of the company..


# Severe bear market of 2008/2009.

It's time for active fund managers to prove their worth

Market volatility should be an opportunity for active fund managers to prove their worth.

Market volatility should be an opportunity for active fund managers to prove their worth. Photo: Howard McWilliam

By Paul Farrow

10:00AM GMT 28 Nov 2011

3 Comments

When I worked at Money Marketing, the leading newspaper for financial advisers, in the late 1990s the City was abuzz: the stockmarket was riding high and investors were making lots of money.

At the time, fund managers tried to put me off the scent of index tracker funds.Their argument was that so-called passive funds that simply track a stockmarket could not add extra value – only managers who were selecting their own stocks could.

The active fund managers' argument would have been sound had it not been for one point I have come to realise over time – that many active fund managers consistently fail to add value. And they still do, as our front page report highlights.

Our article comes just a week or so after it emerged that sales of index tracker funds are at record levels. One factor that explains their popularity is fees, because tracker funds are far cheaper than actively managed ones. The stockmarket turmoil has put increasing focus on fees, which eat into returns. For obvious reasons, fees are under bigger scrutiny when returns are poor – few investors would give two hoots about fees if they were getting bumper returns year in, year out.

Vocal city stalwart Terry Smith has added his voice to the passive funds debate, even though he is an active manager. He argues that investing has become too complicated for savers, and that most investors would be better off buying cheap tracker funds.

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When I suggested to him earlier this year that such a comment would irritate active managers, he retorted: "I don't care if they argue that trackers will underperform. Most active fund managers underperform, and by a far greater margin, because of higher charges."

This is not to say that you should dismiss active fund managers. I readily admit that if you can find a decent one they will serve you better than a tracker fund, which will always underperform the index because of the impact of fees. As I highlighted last week, the Virgin UK Tracker has underperformed the FTSE All-Share by 50 percentage points over the past 15 years.

There are nearly 2,000 funds on the market, and an awful lot fail to make the grade – but they charge annual fees as though they do. This is why you need to ensure that your financial adviser (IFA) is earning his or her crust. There are enough decent fund managers out there, and if you or your IFA discover them, you will be chuffed to bits over the longterm.

Market volatility should be an opportunity for active fund managers to prove their worth. Yet it would seem, however, that many simply aren't up to the job.

http://www.telegraph.co.uk/finance/personalfinance/comment/8919419/Its-time-for-active-fund-managers-to-prove-their-worth.html

You're never too young to start saving

Today's twentysomethings can expect to retire in their 70s. A good reason to postpone saving for the prospect? Quite the opposite.

If you don't start saving for retirement until you're middle aged, you have left it too late Photo: Howard McWilliam

By Richard Evans

3:24PM GMT 06 Dec 2011

13 Comments

Younger people probably didn't pay much attention to George Osborne's announcement last week to raise the state pension age from 66 to 67 from 2026, eight years earlier than planned.

But they should. Based on the principle the Government had previously set out of increasing state pension age in line with improvements in longevity, accountants at PwC calculate that the state pension age could be set to rise to 70 by 2050.

It means that anyone under the age of 30 will have a long wait before they can get their hands on the state pension.

If you've just finished university and are about to start your first job, you're probably not thinking too much about how you will fund your retirement.

To be fair, dealing with student debts, buying your first home and thinking of starting a family are likely to be foremost in your minds. But ignoring any thought of pension provision suffers from a fatal flaw: if you don't start saving for retirement until you're middle aged, you have left it too late. You will never be able to catch up with where you would have been if you'd started earlier.

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Here we explain why this is so, and suggest how those in their twenties can go about preparing for later life without sacrificing their more immediate goals.

I'M ONLY 20. SURELY I DON'T HAVE TO THINK ABOUT PENSIONS FOR AGES?

Starting to build those savings now will make the process a lot less painful.

You may have to rely on your savings for the last 20 years of your life – even if, as expected, we are retiring in our seventies by then. If you don't start saving for retirement until your fifties, you have just two decades to save enough money to last another two decades.

You don't need to be a financial expert to see that that's a very tall order. Something would have to give – either those last years of your working life would see a drastic fall in your living standards, or you would fail to save enough and face an impoverished retirement if you stopped working at the normal age. Many people would simply be forced to work longer.

If makes far more sense to use all five decades of your likely working life to save up the money to fund your final 20 or 30 years.

If you start saving at the age of 20 and put away £75 a month for your entire working life, your savings should produce an income for life of about £17,000 at retirement. Delay until 50 and the same monthly savings will produce an income of about £2,000. Even putting it off until the age of 30 would cut your likely income to £8,850.

Starting early doesn't just mean that you will save for longer. It also gives your investments longer to grow, and you earn interest on the interest. Experts call this "the miracle of compound interest" because it makes a huge difference to total investment returns.

"Saving for retirement is like a diet: what you do day in, day out over a long period is more important than action in fits and starts," said Steve Bee of Paradigm Pensions, a consultancy.

BUT SURELY THE STATE PENSION AND OTHER BENEFITS WILL GIVE ME AT LEAST A GOOD START?

Don't count on it. For one thing, the Government plans to sweep away means-tested benefits for pensioners and replace them with a flat-rate weekly pension of £140 for all. The state's top-up pensions, which paid an income linked to your earnings, are being abolished.

"Given the demographics, there is no reason to think support from the state in retirement will be anything other than at subsistence level," Mr Bee said.

SOUNDS SCARY. SHOULD I START A PENSION RIGHT NOW?

Start saving now, most experts suggest – but not automatically in a pension. In many cases, saving in Isas instead is just as good to start with – and Isas have the extra benefit that you have access to the money if you need it.

John Lawson, a pensions expert at Standard Life, said: "If you're young, saving into anything is good – Isa or pension.

"Pensions are a wonderful discipline but for a basic-rate taxpayer who has no problem maintaining the savings habit, an Isa is fine. You can always transfer to a pension later – in fact if you delay doing this until you're a higher-rate taxpayer, you will actually benefit."

But if you are offered a workplace pension, take it. Within the next few years, every company in the country will have to offer a pension – and enrol employees automatically. The total contribution from you, the company and government tax relief will be at least 8pc.

"You'd be daft to opt out of this auto-enrolment scheme," said Mr Lawson. "You will get a minimum 3pc contribution from your employer."

Ros Altmann, the director general of Saga, agreed that changes to state pensions and the death of final salary schemes meant that the new generation of workers would be "thrown back on private sources of income".

But she added: "Pensions are not the only answer. You could work longer, use your house to fund retirement, run a business and sell it, or take out a range of Isas. The 'pensions or nothing' idea has to change."

WOULDN'T I BE BETTER OFF PAYING BACK MY DEBTS FIRST?

It may seem crazy to save for retirement when you could use the money to cut your debts. But it's not a clear-cut decision – look at the interest rates you pay before deciding.

"If your debts are expensive, such as on credit cards, pay them off first," Mr Lawson said. "But if it's a mortgage or cheap personal loan, there's no reason not to save at the same time. If I'd waited until I was completely debt free before I started saving, I still wouldn't have a pension. You'd be crazy to make 'don't save before paying off debts' your mantra."

Mr Bee said: "Should you save at the same time as paying off debt? Yes if you get a workplace pension. If you opt out, you are adding to your burden in later life – effectively increasing your debts."

HOW MUCH SHOULD I SAVE?

Young people who want to retire on half their final salary will need total pension contributions of 10pc-15pc of earnings throughout their working lives, Mr Lawson said.

So top up your auto-enrolment contributions to about 9pc to get the total to that level. Ms Altmann said conventional wisdom put contributions at 20pc of your salary.

http://www.telegraph.co.uk/finance/personalfinance/pensions/8938276/Youre-never-too-young-to-start-saving.html