Four out of ten homeowners are relying on the capital tied up in their house to fund their retirement. Of those, almost a quarter do not expect to have any private pension savings, showing just how ill prepared millions of people are for when they stop work.

According to research for NOW: Pensions, around two-thirds of property owners say they would move to somewhere smaller or to a cheaper area to release cash. However, many face a nasty shock when the reality fails to measure up to their retirement dream.

Adrian Boulding, director of policy at the workplace pensions provider, said: “Over the next ten years, we estimate that 7.7 million people will retire. Whilst it’s clear from our research that many UK homeowners remain optimistic that they can fill their income gap by trading down to a smaller house, they need to be cautious.

“It’s a well-known fact that there is a shortage of affordable and suitable homes that older people want to live in.”

Those who do find somewhere that suits their needs are unlikely to realise enough cash to fund the life they want.

According to Saga Investment Services 40 per cent of people aged over 40 have no idea how much even the most modest retirement lifestyle costs, and 80 per cent do not know what size of pension pot this would require. They typically underestimate the amount needed by about 50 per cent.

When the over-50s financial services provider asked people how much capital it would take to generate an income of £10,400 a year, they gave an average figure of £126,000. In reality, this would produce just £6,904.

They guessed a pot of £244,000 would be required to achieve an income of £18,600, although this would actually give only £13,300, while they reckoned it would take £500,000 to generate £64,000 a year, a figure that would give just £27,000.

Sally Merritt, head of product at Saga Investment Services, said: “It is a real concern that people in their 40s and beyond are so unaware of what they need in their pension pot to give them the lifestyle they want in retirement.

“People are in danger of becoming pothole pensioners, who face a bumpy road ahead because they didn’t invest well enough when they had the opportunity.

“This could well be because people underestimate how long they are going to live in retirement, or they simply don’t understand what sort of income a typical pension pot can generate.”

And inflation, which now stands at 2.3 per cent, means the amount required to fund a comfortable retirement is rising all the time.

Kate Smith, head of pensions at Aegon, said: “In under 20 years the value of £100 has more than halved, which could severely restrict pensioners’ spending power and quality of life.”

Experts say that maintaining a pre-retirement lifestyle after giving up work requires two-thirds of the income, yet the vast majority of the working population simply are not saving enough.

Government statistics show that a third of people of working age do not contribute to a pension. Some say they cannot afford to while others say they do not know how to go about it.

Ms Smith said: “Only 12 per cent are financially on track for the retirement they want, and half of the population are worried about running out of savings in retirement.

“As a result, over two-fifths of people are currently continuing to work past state retirement age and we are still at the thin end of the wedge. As the country moves away from ‘gold-plated’ defined benefit pensions, towards a defined contribution model which relies on the individual to personally save enough for their own retirement, we’re likely to see many more people work into retirement out of sheer necessity.”

The self-employed are among the least prepared. According to Aegon, three-quarters do not put money away regularly.

Ms Smith added: “The self-employed face unique challenges when it comes to saving for retirement. As well as missing out on a lifetime of employer contributions, a variable income means many don’t have certainty of how much they’ll earn from one month to the next, making saving difficult.

“Preparing for retirement requires a long-term do-it-yourself approach, which is currently being overlooked by too many of the self-employed.”

Those who retire with little more than the state pension face a bleak future. The full annual payment for individuals retiring after 6 April this year will be just £8,296.

Anyone who has not paid 35 complete years of National Insurance contributions will not even be entitled to this much, although anyone with gaps in their National Insurance record can make additional voluntary contributions to improve their entitlement.

To enjoy a comfortable retirement, it is essential to save into a personal or work pension plan. Online tools such as Aegon’s Retiready show how much you will need to put away.

If you are working and have opted out of your employer’s pension scheme, join as soon as possible so you will benefit from its additional contributions. If you are already a member, increase the amount you save by as much as you can possibly afford.

Mr Boulding said: “Workers should budget more than monthly minimum contributions into their workplace pensions savings, the earlier the better, to ensure they do not fall short of their own expectations when they come to retire in later life”.