Save more for your retirement, but not in a pension

Some good news: more people have pension savings than a year ago. In the early autumn of 2012, the UK began to roll out its auto-enrolment pension scheme. Our biggest companies were asked to move first to set up schemes, automatically enrol eligible employees and get everyone saving. And it worked.

The systems have been set up without too much fuss; there are a couple of good providers competing with the state-sponsored National Employment Savings Trust (Nest), and best of all, people mostly aren't exercising their right to opt out of the scheme.

It had been thought that some 30% of those entitled to auto-enrolment would decide they couldn't sacrifice any of today's spending to pay for tomorrow's living. But that number has turned out to be less than 10%. It might rise. So far, only the nation's biggest companies have been forced into the system and they might be more likely to encourage employees to stay in than smaller poorer companies.

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But nonetheless, on Hargreaves Lansdown numbers, some 1.6 million more people are now saving into a pension than might have done without the new scheme. That's good.

Unfortunately, it isn't anywhere near good enough. I don't buy the idea that the finances of the one-day retired are going to be quite as bad as the statistics suggest. Let's not forget that a huge percentage of the population inherits something one day all the housing wealth the current older generation is clinging to will trickle down.

There's also plenty of money held outside pensions. 23 million people have an Isa, and some of them very sensibly hold these investments instead of a pension (I prioritise my Isa over my pension fund).

At the same time, many people also save either via buy-to-let or by living in houses far too big for their needs I don't strictly approve of people using their properties as their pensions, but that doesn't mean it can't work. However, the problem with auto-enrolment is that the amounts people are nudged into saving are minute relative compared to what they actually need.

At the moment, the minimum saving is 2% of each worker's salary (1% from the worker and 1% from the employer), but even by 2018, when it hits its maximum, the total take will only be 8%.

For most people that really isn't very much. If you are making £25,000 a year and put away 8% of your salary (including employer and employee contributions) every year you will still only have about 30% of your current salary to live on after 40 years of saving. And even that assumes regular pay rises, very low charges and a return greater than inflation all things today's young barely dare to dream about. This won't be enough to live on (although, depressingly, it might be enough to stop you getting means-tested benefits).

But how many people will save more than the mandated amount? Might most people not perfectly reasonably assume that saving what the government tells them to save is enough? And what of the people who aren't eligible for auto-enrolment? Anyone who thinks the pensions system is now well on its way to being adequate might note that some 2.5 million people who work for the companies that have joined the scheme so far are neither in the pension scheme nor have they been automatically enrolled - they are too old (over retirement age), too young (under 21), or too poor (earning under £9,440).

Those who are too young will get older, so they might be OK. The others are unlikely to be. You might also want to worry about some of those who have already opted in. When their contribution moves from 1% to 5% in 2018, will they stay in? Note that a piece of research from Scottish Widows suggests that the amount that people are willing to save for their retirement is not rising but falling: it came in at an average of £67 a month in 2012 and is a mere £51 this year. That's not going to get anyone very far (it would make up little more than 5% of the salary of a person earning £25,000 after 40 years).

Look at these numbers and if you were wondering what advice you might give to a young person starting work today, the obvious answer is save more, much more, than auto-enrolment suggests you should!

However, this brings me back to my original point and the existence of huge non-pension savings in the UK. If you save more, should it be into a pension? I suspect that everyone should treat their pension savings as base-income provision, take what they can get in employer contributions and leave it there. Nest makes me nervous for the simple reason that the very existence of a huge pool of money in a scheme dependent on the state for its continuation and its tax relief will one day be too much of a temptation for a chancellor looking for ways to cut the national debt.

And of course, Nest isn't the only temptation. Governments all over the world tend to feel that the upfront tax relief on pension pots somehow gives them a kind of ownership over all the assets saved into those pots. Hence the endless fiddle faddling with allowances and tax rates.

You can expect more of this Labour is already talking about flat-rate relief at 30% for everyone except the 'rich', who under them will only get 20% and you also shouldn't discount the possibility of the state going one step further and simply helping itself to your savings altogether. Other governments have done it without the slightest of nods to shame. Portugal, France, Ireland, Hungary and Poland all have some form here.

The upshot is that if you save a lot of money into a pension and in particular into the likes of Nest you need to stay open to the possibility of ending up with a lot of money invested in government bonds. I'm saving enough for an emergency income into my pension and then sticking with Isas.

This article was first published in the Financial Times.