Act now to avoid pension shock, older workers warned

Set for smaller retirement income than expected.

The nation’s older workers are facing a big gap between the retirement income they want and what they are actually going to get, according to new research.

Aviva’s Real Retirement Report has found that over-45s expect to need an income of £12,590 on average from their savings and investments when they retire. But in reality the average savings amount to just £53,793 -that would produce an annuity income of £3,117 a year or a drawdown income of £3,635 over 25 years.

That means they are facing an income shortfall of £8,955.

Importance of the State Pension

Once you factor in the State Pension that income gap falls to £2,299 at present. From next year the flat rate State Pension will add a maximum of around £7,800 to the average retirement income, which is still not enough to completely bridge the gap.

This means that most people are going to be relying on the State Pension to cover over 50% of their retirement income.

Despite this worrying news, pension confidence is still high. Aviva’s Real Retirement Report found that 43% of working over-45s felt they were financially ‘fit to retire’. But, even those with more substantial pension savings may find themselves overly reliant on the State Pension, as the table below demonstrates.

	All	Those confident they are financially fit to retire	Those not confident they are financially fit to retire
Typical value of savings and investments	£53,793	£109,374	£16,636
Annual income they expect to need	£12,590	£14,000	£11,180
Potential annual income from current savings	£3,635	£7,390	£1,124
Retirement income gap (excl. state pension)	£8,955	£6,610	£10,056
% income gap (excl. state pension)	71%	47%	90%
Retirement income gap (incl. state pension)	£2,299	-£46	£3,400
% income gap (incl. state pension)	18%	0%	30%

“These findings should encourage every person still in work to think hard about their retirement finances,” says Clive Bolton, managing director of Retirement Solutions at Aviva UK Life.

“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.”

What to do

The good news is over-45s don’t have to take massive steps to change their retirement outlook. Simply saving a bit more each month now could easily close the retirement income gap.

Saving an extra £86 a month would be enough for a 45-year-old basic rate taxpayer to boost their pension pot by £42,000. That would be enough to bridge the retirement income gap. A higher rate taxpayer would need to save an extra £64 a month.

Those approaching retirement could also consider other ways of boosting their retirement income. This could mean deferring retirement, taking on part-time work or looking for ways to access tied up wealth.

The equity release market is booming as retired homeowners look to release the money in their home. In the first six months of this year more than £750m of property wealth was cashed in via equity release. This is a rise of 17% on last year, showing that the nation’s pensioners are having to think outside the box in order to boost their retirement incomes.

For more read Pros and cons of equity release.

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