Higher earners borrow more as a percentage of income

Latest data from the HL Savings & Resilience Barometer shows the top fifth of earners (who as a household make an average of £91,950) have monthly mortgage payments of £1,211 and other monthly debt repayments of £673 – which in both cases are around a third higher than the national average.

Although they may feel these payments are manageable right now, they need to find almost £1,900 each month, just to cover their debts. If they’re set for a remortgage in the coming months, they could also see a big step up in monthly payments, because so many will be moving from rates of under 3% to average rates of over 5%. This makes them particularly vulnerable to a change in income or circumstances.

The Savings & Resilience Barometer also shows fewer than two in five people on track for a moderate retirement income, which is set at £25,000 per year for a single person and £36,480 for a couple. Among the two highest-earning quintile households, this rises to two thirds, but many of them will be used to spending much more than that and will be in for an income shock in retirement. It means there’s no room for complacency about the amount high earners are saving for retirement. A change to tax relief to make it less rewarding for higher earners to pay into a pension would mean they get less bang for every buck they contribute, and would need to put significantly more aside to build the retirement pot they need.

There have also been suggestions the government could limit the amount of tax-free cash people can take from pensions to less than the current 25%. There’s a real risk with this rumour swirling that people could panic and take tax-free cash that leaves them in a worse position financially. Switching into cash savings and removing money from a tax-efficient environment could devastate the returns they need later in retirement.

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “Earning more doesn’t make your finances bulletproof. In fact, running a household with higher income, spending and debt, can make you more vulnerable when things change. And changes are likely to come thick and fast in the coming months.

“You can’t move for rumours around the potential pain looming for higher earners in the Budget this October. Speculation has focused on taxes around pensions, capital gains and inheritance – all of which are key for higher earners. However, at this stage these are just rumours, and while we focus on them, there are three major risks flying under the radar that are almost guaranteed to hit higher earners hard.”