Retirement Income Gap

The typical working over-45 year old faces a £8,955 annual retirement income gap based on their current savings and investments – meaning they will rely heavily on a state pension that will still leave them short, the latest Aviva Real Retirement Report shows.

The report reveals that over-45s, who are not yet retired, 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 potentially crippling £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. Despite the shortfall, 43% of working over-45s feel they are financially “fit to retire”.

Aviva’s findings are especially concerning for those over-45s who are closer to retirement and have less of a window to grow their savings. 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, Aviva’s analysis offers hope to over-45s by showing how a modest boost to savings habit 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.

With auto-enrolment only just reaching smaller companies, two in five over-45s have a company pension (43%). Fewer still have a personal pension or SIPP (30%); far below the 82% with current accounts and 70% with savings accounts. Having savings accounts, ISAs and company pension savings are key indicators of feeling confident about retirement finances. ISAs contribute 11p for every £1 saved by over-45s, but again less than half (46%) use this method of saving. Buy-to-let (BTL) property contributes 19p in every £1 overall: almost as much as ISAs, savings accounts and current accounts combined (20p). But this is an expensive venture: among those who have a BTL property, the typical investment is £126,440.

Clive Bolton, Managing Director of 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.”

Tackling the retirement income shortfall – what should consumers consider?

1. Understand what your total savings pot will provide as retirement income and how this measures up to your expectations.
2. Consider the diversity of your investments – could you get better returns by spreading your money around more?
3. Commit to pensions and make the most of personal and employer contributions.
4. Consider steps you can take to increase your savings – whether it is increasing pension contributions, working for longer, or taking on a part-time job in retirement.
5. Take an active interest in how your savings and investments are performing – don’t let apathy rule your future.
6. Act sooner rather than later to adjust your strategy and contribute more whenever you can.