Having a comfortable income in retirement is something many of us strive for throughout our working lives. However, new research carried out by Aviva has revealed that a large number of workers heading towards retirement may be facing a large income gap – a gap that won't be entirely filled by payouts from the state pension.
According to the latest Real Retirement Report, a typical worker currently aged 45 or over is facing a £8,955 annual retirement shortfall based on their current earnings and savings.
Over-45s typically expect a yearly income of £12,590 from their pension savings and investments, but the report showed that these savings only amount to a total of £53,793, which would deliver an annual income of only £3,117 if a typical annuity is purchased, or £3,635 a year if a 25-year income drawdown agreement is reached. This means that the average worker would only be able to fund 29% of their hoped-for retirement income.
Of course, the state pension can help to plug the gap, but workers should be wary of relying upon this source of income too much. The average state pension would provide an income of just £6,656 per year, which would still leave the average worker with a £2,299 shortfall.
Worryingly, it seems that many workers are heading blindly towards this income gap: 29% of over-45s questioned in the report admitted that they had not even thought about how much income they would need, with older workers (those aged 55-64) being the most likely to have neglected the issue (34%), despite being closer to retirement.
Compounding the problem is the fact that a large number of workers still don't pay into a company work pension: the report found that only two in five respondents (43%) paid into a work pension scheme while even fewer (30%) had a personal pension or SIPP (Self-Invested Personal Pension).
Nevertheless, 43% of over-45s questioned said that they feel they're "financially fit" to retire, although this figure dips significantly among older respondents: just 34% of those aged 55-64 stated that they were confident about their financial preparations, a figure that perhaps reflects the shorter time period this demographic has to correct the problem.
Commenting on the results, Clive Bolton of Aviva said: "These findings should encourage every person still in work to think hard about their retirement finances. 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."
However, all is not lost! If you're still working, then you still have the chance to close the financial gap and secure yourself a comfortable retirement income. According to Aviva's calculations, a 45-year-old planning to retire at age 67 (on the basic rate of 20% tax) would only need to save an extra £86 per month to plug the gap left by their savings and state pension allowance.
A great place to stash this cash is in your company pension scheme as you can then also benefit from employer contributions, but topping up your other savings accounts and investments can be a good call, too. A regular saver can be a great way to encourage the savings habit, or if you are prepared to take on a little extra risk, a stocks & shares ISA may be worth looking into.
If you are unsure, or you want help making a plan to reach your ideal retirement income, an independent financial adviser can help. Whatever you do, don't bury your head in the sand – the earlier you start to prepare for retirement, the better.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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