The two big risks facing higher earners as prices rise

• Among the people in the least deprived areas in England, one-in-five (19%) are having to borrow more now than 12 months ago (source: Public opinions and social trends, Great Britain: household finances by personal characteristics – Office for National Statistics)
• The two biggest measures of deprivation are income and employment, so the least deprived areas contain more higher earners
• The essential costs of those in the least deprived areas are also rising – 59% say their cost of living has gone up compared with a month ago
• Previous ONS data shows higher earners borrow more than lower earners and that higher earners had high outgoings already
• How to save and invest to protect yourself

Sarah Coles, head of personal finance at AJ Bell, comments:

“Higher earners are performing a high wire act. They spend more than anyone else, and their costs are rising. They also borrow more than anyone else, and their use of debt is increasing. The question is whether they have a robust enough safety net in place to protect them.

“Research from the ONS last week found that 59% of people in the least deprived areas say they’re spending more than a month ago. In these areas, average incomes are higher. When asked to name the rising costs, 92% of this group mentioned food, 76% fuel, 63% gas and electricity, and 10% the mortgage or rent. These are non-negotiables, so they have no choice but to spend more unless they’re prepared to make cuts to their lifestyle. Previous research from the ONS in June showed that the richest fifth of households were already spending around 2.7 times more than the poorest fifth, at £1,083.60 a week compared to £407.30.

“To maintain this level of spending, many will also borrow. Last week’s data shows 19% of people in the least deprived areas are having to borrow more than they did 12 months ago. And this is rising from an already high level. Separate ONS data showed that in 2022, the more people earn, the more likely they are to have debts. Almost three quarters (73%) of the top 10% of earners have debts – 56% have a mortgage and 47% have other debts. Among the lowest earning tenth of people that figure drops to 44% (11% mortgage, 38% other).

“According to the latest FCA Financial Lives survey, overdraft use peaks among those with a household income of £15,000 to £30,000. However, even among those making £100,000 to £250,000, 9% of people have been overdrawn in the previous 12 months and 8% of them say they are usually overdrawn by the time they get paid. Meanwhile, credit card use peaks at 24% among those earning £30,000 to £50,000. However, 13% of those earning £100,000 to £250,000 have used a credit card in the previous 12 months. And while 15% of people in that group pay their card off in full every month, 8% usually only make the minimum repayment.

The importance of having a safety net

“While they are earning at a higher level, people may be confident they can manage their costs and are on top of their debts. However, they are particularly exposed if their circumstances change and if one or more members of the household loses work. If they are relying on a single earner, they’re particularly vulnerable. It means they need to build enough of a safety net to protect themselves.

“To be financially resilient it’s a good idea for households of working age to build enough emergency savings to cover three to six months’ worth of essential spending – rising to one to three years’ worth in retirement.

“For higher-income households, this will be a significantly higher sum, not just because they tend to spend more on things like the mortgage and food, but also because they may have important costs that less wealthy households don’t – like private education. Rather than relying on estimations, it’s worth working out what you spend on the things you can’t cut in an emergency.

“This money should be in an easy-access savings account, so you can get hold of it when you need it. Don’t just settle for an account from the high street giants, because you might get a more competitive deal from online banks and cash savings hubs.

“But building financial resilience shouldn’t stop at setting up an emergency savings pot. Once you’ve accounted for the essentials each month, any spare cash could also be saved or invested in your pension, or another account such as a Stocks and Shares ISA, to build financial resilience for the long term.

“Many of those who are still working will be automatically enrolled in a pension from their employer, contributing a percentage of their earnings to their pension. It’s worth exploring whether your employer offers matched contributions – if you can afford to, increasing how much you put in will help sure up your finances for when you come to retire.

“Although you can’t access your private pension until 55 (rising to 57 in 2028), any investment growth or dividend income over the years will be protected from tax. When you come to retire, you can access 25% of your pension pot as a lump sum free of tax. If you’ve built up a pot through investing using an ISA, it’s possible to access the cash more easily than with a pension by selling some investments and withdrawing the funds – but this should really only be a course of action if you have no other options.

“It’s also important to consider insurance such as critical illness cover and income protection, in case you have an illness or accident that means you can’t work for a period. If you have people who rely on you, you may also want to make sure you have life insurance, not just to pay off any debts, but to ensure any children can be cared for, for as long as they need.

“It’s easy to assume that having a higher income and more assets means your finances are completely robust, so you only realise the risks you were taking when something goes awry. It’s why getting financial advice can be so valuable, because an adviser will look at your financial life in the round – addressing not just the things you know you need help with, but those you don’t too.”

Sarah Coles
Head of Personal Finance

Sarah Coles is head of personal finance. She’s passionate about helping people get to grips with their money, so they have more freedom to do the things that really matter to them in life. She regularly provides insight and analysis for the press, writes columns and articles and appears on TV and radio. She covers everything from savings and investments to pensions and tax. Sarah is an award winning former financial journalist, spending almost 20 years working for publications from Bloomberg to Moneywise and AOL Money. She has worked as a financial spokesperson for the past nine years, and most recently won Headline Money’s Expert of the Year award.