Neville's verdict comes a week after FIFA released their latest rankings, showing that, according to the statistics, England are the fourth best team in the world.
But Neville does not feel that should obscure the true reality of the situation and accepts to be regarded as true contenders for the World Cup in two years' time, significant improvement is required.
"There is no point in kidding ourselves," he said.
"We are not quite at the same level as Spain, Italy, Portugal and Germany.
"What we have shown is that we are a difficult side to beat. We fought like crazy. Hopefully over this next four years the manager can get his principles across to the players and we can do better.
"But the reality is there are a lot of nations out there who have very good football players and we have to be respectful of our position."
New boss Roy Hodgson, with minimal preparation time, managed to guide England into the quarter-finals at Euro 2012, where they were beaten on penalties by Italy.
Strangely, the Azzurri will be England's first opponents of the new campaign, in a friendly to be played in Berne on August 15.
A little over three weeks after that, they will embark on a trip to Moldova for the first World Cup qualifier on the road to Brazil 2014.
Neville's position is among those who regard Euro 2012 as a success, even though elimination was exceptionally painful - another shootout loss against another of those teams who are 'no mugs' as the former Manchester United full-back likes to describe them.
"Overall it was a good tournament," he said.
"That is not to say we settle for the result. We don't. We are disappointed.
"To a man, after the game, from the manager to the administrative staff, everyone was devastated. We were all thinking whether we could have done things differently.
"But every single person gave their all. That is all you can ask."
Now, though, Hodgson gets his chance to put an imprint on his squad.
The not guilty verdict in John Terry's court case leaves the way clear for Chelsea's skipper to extend his international career, meaning the squad that went to Poland and Ukraine this summer should all be available for selection.
Given the fact he was overlooked, Rio Ferdinand was unlikely to be chosen anyway. However, under the circumstances, it seems improbable he would want to play at national level again.
Yet there are others, somewhat less controversially, who may find themselves on the sidelines.
With Kyle Walker, Chris Smalling, Jack Wilshere and Jack Rodwell among those seemingly certain to be of long-term interest to Hodgson, there must be doubts over Frank Lampard and Gareth Barry, both of whom missed this summer's action due to injury.
Yet even if that experienced duo find themselves overlooked for the first few games, Neville would urge them never to turn their back on England.
"I never retired from playing for England," he said. "I wouldn't advise anyone to do that.
"The idea you can just bring in a new team is fanciful. It doesn't happen just like that.
"There is a case for bringing in young players, I have been brought up that way, but you need experienced ones as well.
"I didn't mind going to Kazakhstan at the age of 33. Why should I be too big for that?
"In my opinion, England retires you. There is no embarrassment or shame in that."
With so much experience, Neville was generally regarded as a force for good within the England camp, even if he admits his calm authority often went out of the window in games.
Yet, as he did throughout his career, the 37-year-old showed a thirst for knowledge that will keep him fulfilled given he has no aspirations to enter the management game.
"I really enjoyed it," he said. "Who would not enjoy being part of a tournament? It was an incredible experience for me.
"But I am acutely aware it is only the very beginning. I am ambitious and young and I want to learn more.
"I have no aspiration to be a football manager. I want to do what I am doing and make as big an impact as I can."
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