The dangers of pension complacency

I wrote here this week that one of my worries about the new auto-enrolment pension scheme was that it would breed complacency among savers. After all, if the government mandates that you must save a certain amount, why should you even think of saving more?

Under the current terms of the deal, that would be a mistake: save 8% of an average salary throughout your working life into a pension fund and, while you will certainly feel poorer in the short term, you might not end up that much richer in the long term.

A case study in the Mail on Sunday this week didn’t set my mind much at rest. Emma Shortt, aged 28, has been automatically enrolled by Travelodge. There is good news in that while she never bothered to enrol in the firm’s previous scheme, auto-enrolment has meant she has stayed in the Nest scheme that has now been set up for her.

But there is bad news too: she thinks that’s enough. “I can relax now”, she says. “I’m all set.”

Would that she were. If she is currently on a salary of £25,000, she saves 8% a year and she doesn’t take a tax free lump sum on retirement, she will end up with an annuity worth £220 a month (assuming she wants it to rise with inflation during her retirement).

I fully accept that this is better than nothing, that annuity rates will (hopefully) not be this low in 30 years, and that Shortt’s contributions may well rise over time (she says that as she moves upt the company she will “put more in.”) But she just isn’t “all set”.