Retirement savers have a massive gulf between the income they expect in retirement and the amount they will actually receive.
Those approaching retirement hope to have an annual income of an average £17,728, but are picking up £5,369 less because they are not saving enough while they are at work.
Instead, they are paid just £12,359 a year – around 30% less than their expectation.
Translated into saving terms, someone approaching retirement would need to put an extra £66,549 into their pension to bridge the gulf between their financial hopes and their eventual financial reality.
The typical pension pot at retirement is more likely to be an average £51,452, according to Virgin Money, the firm compiling the figures.
Open market option
The firm suggests that the shortfall comes from misunderstanding how much the state pension will pay and reluctance to save enough money to fund retirement.
Money advice organisations suggest retirement savers can make up some of this missing cash by shopping around for the best value for money annuity.
Annuities generate an income that is guaranteed for life.
Virgin argues shopping around for an open market option annuity gives better value than an annuity offered by most pension providers.
The National Association of Pension Funds and the Pensions Institute calculate pensioners lose between £500 million and £1 billion every year lifetime annuity income by failing to shop around for the best deal.
Anthony Mooney, a Virgin Money director, said: “These results are disappointing for those approaching retirement who expect an income that is unachievable on the current average pension pot. They can mind this gap by shopping around for a good annuity.
“The right annuity could boost retirement income by around 20%, but won’t make up all the money someone needs unless they readjust their expectations.”
Enhanced annuity
Virgin reckon around 50% of retirement savers buying an annuity shop around, but the rest settle for an annuity offered by their pension provider.
Several financial advice companies offer a comparison service to find the best annuity.
One, The Partnership, has also warned that pensioners could increase their annuity payments by declaring illnesses to their provider.
Annuities pay more to consumers with life-threatening illnesses as the contract is likely to run for a shorter term than that of a fit and healthy pensioner.
For instance, the firm suggests that some suffering with diabetes, a common illness, could earn an extra 9% income from an enhanced annuity rather than accepting a standard contract.
