The report, backed by the National Association of Pension Funds (NAPF), showed that both men and women aged over 50 are underestimating both how long they will live after retirement and how much income they will receive from their pension plans.
On average, women in their 50s underestimated their life expectancy by four years in comparison to national projections, while men did so by two years, according to the report. In addition, those aged between 50 and 64 who were paying into a defined contribution (DC) scheme overestimated the income they would receive from the annuity purchased on retirement.
NAPF chief executive Joanne Segars said that insufficient retirement planning, combined with a "tough" annuity market, could result in workers' savings not being able to stretch far enough.
"It's worrying that so many over-50s are sleepwalking into their old age and are expecting to be better off than they will be," she said. "The average saver with a defined contribution pension is being over-optimistic. They need to see their pension pot grow by almost 80% to meet their expectations. That is a huge ask if they are only a few years away from their retirement party."
She said that by adjusting the amount that they saved, or reconsidering how long they were prepared to work for, older workers would still have time to "take some control" of their retirement plans.
DC schemes do not guarantee what members will get when they retire. Contributions to the scheme are invested in an agreed way and the employee can then buy an annuity, which is a type of insurance policy, to provide an annual income on retirement with whatever funds are available. Unlike traditional defined benefit (DB) pension schemes, which promise a set level of pension once an employee reaches retirement age no matter what happens to the value of the underlying investment, it is the employee who bears the full risk of a DC pension losing its value or not performing as well as expected.
These schemes are becoming more popular, particularly in the private sector, as employers struggle to cope with the cost of providing DB schemes to their employees due to increasing life expectancy and poor investment results. At the same time annuity rates have fallen consistently; however, the IFS report showed that few savers were 'shopping around' to get the best deal. The study found that, in recent years, only 28% of those purchasing annuities bought one from a provider other than the firm they held their pension with. A third of pension savers aged between 52 and 64 were unable to offer even a rough estimate of what their pension income might be in retirement, according to the figures.
"This report is a wake-up call for all those who haven't yet thought about saving for retirement," pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said. "The roll-out of automatic enrolment will lead to a dramatic increase of pension savers, but the levels of those savings for most are likely to prove woefully inadequate. Gone are the days when so many employees were free from retirement worries because their employer had put them into a defined benefit scheme."
According to a report from the Office of National Statistics (ONS) earlier this year, the number of people staying on in employment beyond the state pension age (SPA) has doubled in the past two decades. However, it suggested that this could be down to "improved health and well-being" and people living longer, as well as financial pressures.
Men are currently entitled to claim the state pension from the age of 65, while women are entitled to a state pension from the age of 61. The default retirement age (DRA) was abolished in October last year, meaning employers are usually unable to force employees to retire once they become entitled to draw a pension. The SPA will be equalised for both genders from 2018, with both set to rise to age 67 by 2028. The Government has announced that it plans to introduce an "automatic mechanism" to link future increases to longevity.