Over-45s typically expect to need an annual income of £12,590 from their savings and investments when they retire. But Aviva’s analysis shows their typical current savings and investments only amount to £53,793, which would deliver income of £3,117 a year if an annuity is bought or £3,635 each year if invested in a drawdown plan over 25 years.
This means the typical person only has enough private savings to finance 29% of their target income: leaving them with a potential £8,955 retirement income gap every year before the state pension is taken into account.
Today’s average state pension income of £6,656 would bring their annual shortfall down to £2,299 in retirement. It means that the typical person is relying on the state pension to fund more than half (53%) of their expected retirement income. But not even the new flat rate state pension – offering a maximum of around £7,800 to those who will qualify for it from April 2016 – will fully bridge the gap between their expectations and reality.
Despite the shortfall, 43% of working over-45s feel they are financially “fit to retire”. Confidence is highest among those aged 45-54 (69%) who have the most time to tackle the shortfall and grow their pots. But among those aged 55-64, just 34% are confident that their financial preparations leave them “fit to retire”.
Even those over-45s who are confident and have the largest pots (£109,374) can only rely on this sum to provide an annual income of £7,390 over a 25 year retirement. This is £6,610 short of the £14,000 a year they expect to need, although their confidence may reflect a degree of awareness that the state pension will at least make up the difference.
Worryingly, 29% have not even thought about how much retirement income they will need. Those aged 55-64 are more likely to have neglected the issue (34%) than 45-54s (21%) – despite having less time to act.
However, a modest boost to savings habits can help them build an extra pot of £42,000: an amount which, in today’s money, would bridge the remaining £2,299 retirement income gap once the state pension is added to their existing funds.
Assuming they wanted to retire at 67, a 45 year old paying the basic 20% rate of tax could reach the target of £42,000 by increasing their monthly savings by £86, or just £64 for a higher (40%) taxpayer.
Even if they delayed taking action until the age of 55, they could reach the £42,000 target by 67 by saving an extra £179 a month (for basic taxpayers) or £134 (for higher taxpayers).
Clive Bolton, Managing Director, Retirement Solutions, Aviva UK Life, said:
“These findings should encourage every person still in work to think hard about their retirement finances and which group they fall into: the reasonably fit to retire, the potentially fit to retire or the currently unfit to retire. The pension freedoms have broadened people’s financial options in later life – but they don’t guarantee freedom from responsibility when it comes to better planning and improving savings habits.
“As things stand, the vast majority of people are in danger of being left short-changed by insufficient savings pots, but with the addition of the state pension, the gap is narrow enough to enable them to take action to close it completely.
“Finding additional ways to supplement their savings, such as increasing pension contributions while they are in work, working for longer or taking on a part-time job in retirement, may be enough to help them reach their target income.”
