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Home Banking Pressure lifts on middle earners, but the damage is already done

Pressure lifts on middle earners, but the damage is already done

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  • Middle earning households make an average of £34,026.
  • The worst gaps in their finances are in long-term planning – almost two thirds score ‘poor’ or ‘very poor’ when it comes to investment (62%), and around half get the same score for pension planning (48%).
  • Around a third do poorly when it comes to debt (35%) and protection (30%).
  • Even when it comes to saving and balancing the budget, one in five score ‘poor’ or ‘very poor’ (21%).

Figures from the HL Savings & Resilience Barometer, July 2024

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“The enormous pressure on middle earners is starting to lift, as wage rises, taxes fall, and inflation shrinks. It means for many of them, they’ve finally arrived in the light at the end of the tunnel. Unfortunately, after such a long period of struggling, as their eyes adjust to the light, they can see they’re standing among the wreckage of their financial resilience.

Pressures had been rising for this group since the pandemic, as the result of both inflation and frozen tax thresholds, which pushed more of them into paying more tax. However, inflation is now back to 2%, and being outstripped by wages. At the same time, National Insurance cuts this year mean that taking into account all the NI and income tax changes of since 2021, the average full-time worker is £340 a year better off than if none of it had happened.

This is reflected in the fact the Barometer shows they have £176 left over at the end of the month, which means 41% have enough wiggle room to be considered resilient. It’s not an astounding sum of cash, but the fact they’re not entirely running on empty makes a real difference.

The challenges

However, such a long period of being stretched to breaking point has taken a toll on financial resilience. Long-term planning is the most striking Achilles’ Heel of middle earners. Most of them do a solid job of balancing the budget and putting money into short-term savings, but half of them (48%) are falling seriously short when it comes to investment and pensions. There are also worrying gaps in their insurance cover and growing debt problems.

One of the most alarming gaps is in pension planning, and just 28% are on track for a moderate retirement income. This isn’t anything lavish, it just covers the basics and a small number of the ‘nice to haves’ like an annual two-week holiday in Europe.

They’re not taking advantage of investment opportunities either. The Barometer doesn’t just look at whether you invest: it looks at this in the context of whether you have enough cash set aside to be able to afford to invest. Most middle earners who can afford it aren’t investing – and 62% score poorly here.

The fact they’re not planning further ahead is making it more difficult for many of them to get onto the property ladder, and just 21% are homeowners.

Around a third are missing the opportunity to put key protections in place for their family, like life insurance and income protection. Only 39% of them have enough life insurance to care for their family and cover their liabilities if they were to pass away.

They’re faring better on savings though, and 59% have enough savings to cover at least 3 months’ worth of essential expenses – the minimum recommended about. They’re also building their savings – putting aside 6% of their income.

What should you do?

The first step is to work out what you can afford to free up in your budget right now. If you have had a pay rise ahead of inflation, you may have more wiggle room than you were expecting. You can then work out where gaps have opened up in your financial resilience.

If you have a protection gap, this needs to be filled as a matter of urgency. Some policies are a legal requirement, others would be financially devastating if you needed to claim. If you have a major burden of short-term debts, these should also be a key priority. At the same time, if you’ve spent savings – or simply never had enough – or if you’ve fallen behind on pension contributions, or aren’t investing, these also need a boost.

Some people will tackle a handful of the most urgent priorities first. Most people will split the available cash between their goals, so they can close all the gaps in their resilience over time.

It’s also a good opportunity to revisit wider plans for your financial life. If, for example, you were hoping to buy a first property and got derailed, this is a chance to open a Lifetime ISA, or pay into one, and get a 25% bonus from the government to help you hit your target. If you have stopped things like saving for children you could consider opening a Junior ISA, or restarting regular payments, so the whole family is back on an even keel.

Some people may actually have the resources they need already, they’re just in the wrong place. A special edition of the HL Savings & Resilience Barometer in May found that 2.4 million of those without enough life insurance to protect their family can afford to close their life insurance gap from the spare cash they have at the end of the month – without leaving themselves short.

Meanwhile, 6.4 million households have no arrears and more than enough savings, but no investments. They can move the extra savings they don’t need for 5-10 years or more into stocks and shares ISAs. Then there are12.2 million households who don’t have enough pension savings for a moderate lifestyle in retirement. Almost 7 million of them aren’t in arrears and have the excess cash or investments that could be used to boost their pensions or SIPPs. Sometimes you don’t need more money – it just needs to work harder for you.”

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