Best of Money: ‘We’re struggling to get by on £200,000 a year’
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Nisha Sharma never thought she would consider herself a member of the “squeezed middle”.
Aged 45, she works in IT marketing for a large consumer goods company and lives in a £700,000 house in Croydon, south London. Married with a four-year-old daughter, the combined income of Nisha and her husband nudges £200,000 a year.
Life should be good, yet incredibly, Ms Sharma claims she and her family are struggling.
“In theory, with our household income, we are in the top 5 per cent of the UK population and yet it does not feel that way,” she says. “If you’re earning millions of pounds, then you’re OK — and at the other end of the spectrum you get everything paid for. We are caught in the middle where we are paying for everything.”
Low-income families across the UK will find it hard to stomach such sentiments after six years of public spending reductions and cuts to benefits, alongside the effects of a slow economic recovery. Incomes for the top tenth of earners confer life choices and career opportunities not available to those at the bottom of the scale.
Nonetheless some professional couples, typically mid-career and approaching middle age, are feeling that family finances are much more challenging than they were for the generation before them.
They may be in well-paid jobs, but having started a family, are seeing their income sapped by rising property prices, school fees and childcare costs. At the same time, public policy has moved against them. The removal of child benefit and entitlement to tax-efficient childcare vouchers for higher earners — while a politically popular move — has added to their expenditure, as have new requirements to provide nannies with pensions.
When it comes to their own pensions, valuable tax reliefs for higher earners have been significantly pared back from April this year. Unlike previous generations, their children will be leaving university with tens of thousands of pounds of debt, entirely reliant on the “Bank of Mum and Dad” to fund mortgage deposits.
In assessing whether the complaints of the “squeezed upper middle” stand up to scrutiny, FT Money has identified a troubling development among those seeking to balance their books: some are denuding their pension savings as they divert cash once earmarked for their retirement to meet the increased costs of maintaining the traditional middle class dream.
Buy now, pay later
Anecdotally, financial advisers say this is an increasingly common problem, although statistics that detail the extent of pensions “under-saving” are hard to come by.
“It’s a very large problem,” says Rebecca Taylor, a certified financial planner at Aurea Financial Planning. While she accepts there will be little public — or political — sympathy for couples earning as much as the Sharmas who say they are struggling, the decision to save less into a pension in order to keep up with school fees or buy a bigger house is an easy way of balancing the budget, but could result in parents having to work for much longer in later life.
“There is a lack of realisation of quite how much money you need in capital terms to provide a level of income in retirement,” Ms Taylor says.
To compensate, more people are working longer to ensure they have enough money for a decent retirement. Research from Aviva, the pension provider, shows that one-third of over-50s are now looking to stay in work longer than they had originally planned for when they were in their 40s.
Professional couples who strived in their twenties and thirties to build their careers, buy a family home, and get their children into good schools may start to wonder whether it was all worth it.
“The cost of living in London, coupled with any benefits including pension allowances being stripped from supposedly high earners puts a financial strain [on us]”, says Ms Sharma. “You can no longer categorically say that we are part of the elite high earners in the UK living a high life.”
According to the Office for National Statistics, more than 5m British households have an average annual gross income of just under £90,000 — an income bracket containing financial services professionals, doctors, lawyers, headteachers, senior army officers and university professors — the bedrock of the upper middle classes.
Yet the cost of obtaining the traditional markers of status — owning your own home and sending your children to public schools — has rocketed, particularly within London and the south east.
Prices of family homes within the M25 have soared. According to JLL, the global property advisory group, over the past 10 years the price of a family home in the Greater London area has risen by 86 per cent to an average of £550,000. Over 30 years, it has shot up by an incredible 475 per cent.
For many couples, the strategy of selling their London property to buy a much bigger place further out of town has been thwarted. In recent years, the sharpest increases in London house prices have been in the outlying boroughs, meaning three bedrooms and a garden will now require a substantial mortgage.
The “game plan” of moving to a larger property every seven years has largely been abandoned, says Jonathan Hopper, managing director of Garrington Property Finders.
“There used to be a widely held ideal of doing the ‘London thing’ for so long before moving to the country,” he says. “But now, rather than be led by the heart, people are being led by their heads — and where they can achieve their needs based on their budget as set by the market.”
As for finding a house in the catchment area of a decent state school in more affluent areas, a one point increase in a primary school’s Ofsted inspection rating can add up to £50,000 to the cost of family homes within its catchment area, according to a study by the University of Sussex.
Couples who have held on to their first flats as buy-to-lets, leveraging off the back of rising house prices to obtain even larger mortgages as they move further out of London, have been stymied by recent tax changes. The wealthy have been “shifting money out of the stock markets and into property” in the wake of the 2008 stock market crash, notes Charles Calkin, head of financial planning at James Hambro & Co. However, the introduction in April of an additional 3 per cent rate of stamp duty on second homes combined with the reduction of other valuable tax reliefs means that dinner party conversations about buy-to-let are rather different nowadays.
School fees have also risen extraordinarily quickly in recent years. According to research conducted last year by Lloyds Bank Private Banking, UK public school fees have increased by a fifth in just five years — four times faster than the average rise in salaries. Separate research commissioned by Killik & Co, the wealth management group, last year found that the average fees for day school were 342 per cent higher than they were in 1990.
The widely held notion that British private schools represent the gold standard of a decent education has seen a huge influx of foreign nationals sending their offspring to be educated in the UK. According to a survey by Wealth-X for Knight Frank, the overwhelming majority of the super-rich want to give their children an education abroad. And it is a fair bet that a large proportion of these youngsters will be heading to the UK — ensuring that school fees will remain buoyant for years to come.
As parents save to afford increased school fees, rising childcare costs are a further pressure on overstretched family budgets. The cost of a nursery for children aged two and above rose by 69 per cent between 2005 and 2015 — more than twice consumer price inflation — according to the Family and Childcare Trust. The charity’s research found that a nursery place for 25 hours a week costs an average of £112, rising to £149 in London — and this was before the impact of the new living wage in April, which experts have predicted could increase costs further still.
Since 2013, those households with a parent on a salary of £60,000 or more are no longer entitled to child benefit, worth just over £1,000 per year for the eldest child and £700 for subsequent children.
Subsequent Budgets have seen reforms promising “tax-free childcare” by 2017 as the current voucher system is overhauled, so any parent earning more than £100,000 or more will be excluded. “You could be a family getting universal childcare and then mum or dad gets promoted or works more hours and then you are taken out of tax credit as your earning threshold is higher,” warns Jill Rutter, head of policy and research at the Family and Childcare Trust.
“You then face a huge drop in the amount of support you get for your childcare costs, down from 75-80 per cent, right down to 20 per cent.”
Couples who choose to employ a nanny to look after their children have long complained about having to pay their salary and benefits out of their own taxed income, effectively being taxed twice.
However, under new auto-enrolment rules, they now also have to provide their nanny with a pension, potentially adding thousands to the cost.
“Everyone is looking at the family finances in general to see where savings can be achieved without having too much impact on their lifestyles,” says Sarah Lord, wealth planning director of Killik & Co.
She counts herself among the squeezed middle. “Only yesterday we got confirmation that our daughter had got her [private] primary school place,” she says. “But the implication of that means no afterschool club.
“I know all too well the financial pressures — mortgage costs and property prices as well.”
The pensions time bomb
To meet these rising costs, the temptation is to reduce or even stop contributions into a pension or other retirement savings — one of the only areas of flexibility in middle class family budgets.
“The young professional who is earning good money, but looking to start a family, or already has one, is finding it difficult to save for their own financial goals — and retirement is being put on the back burner when it shouldn’t be,” says Ms Lord at Killik & Co.
The issue is compounded by leaving it too late, adds Ms Taylor at Aurea. Crunching the stats, she says that if you were in your early 40s with approximately £100,000 already saved and wanted a gross income of £50,000 in retirement then you would need to save about £3,000 a month. Achievable perhaps, if you are earning more than £100,000 a year, but painful all the same.
Couples are often unaware of how little income even substantial pension savings can generate in today’s era of low interest rates. Generation X — now entering middle age — is far less likely to enjoy the benefits of a generous “final salary” pension as their parents would have done. The lifetime allowance that can be saved tax free into a pension fell in April to £1m, down from the £1.6m limit just under 10 years ago.
This may be a substantial drop, but, assuming you’ve saved £15,000 a year for 30 years, it should still provide an income of just under £40,000 a year, explains Ben Yearsley, investment director at Wealth Club.
Furthermore, since April, those with total annual income of £150,000 or more — which includes not just salary, but income from investments and buy-to-let properties — are only entitled to save £10,000 a year tax free into their pensions under the new annual allowance taper.
But should you be helping your children or parents before yourself?
No, says Patrick Connolly, head of communications at Chase de Vere. “It is understandable that someone would want to help out their children,” he says. “But they shouldn’t do it and neglect their own personal finances.”
Parents might hope to “catch up” on pensions contributions in subsequent years as their children age, but this strategy could be undermined by the rising costs of sending a child to university, for example.
Mr Connolly’s point is simple: “If you have your own finances under control over the longer term, then you will be in a better position to help.” You might think you are helping now, but if you are unable to support yourselves financially in later life, then in turn you could become a burden on your children.
Advisers recommend that overstretched parents spend some time establishing the facts behind their finances, and budget accordingly.
“It might take a compromise in spending less now, but there is generally something you can do,” says Ms Taylor at Aurea. “The first thing is obvious, but start saving. And go and talk to someone.
“The earlier you sit down with someone and go through all these things, the more chance you have of achieving something.”
Wealth managers might only seem like an option for the super-rich, but there are those, such as Killik & Co, that cater for those in the middle-income bracket.
“Wealth managers are being asked to protect and manage money in more intelligent ways to alleviate the squeeze on the middle classes,” says Lee Goggin, co-founder of findawealthmanager.com.
“Many now advocate wealth being managed at the family level so that, with assets being pooled, younger generations can access investment management and financial planning expertise far sooner than waiting to become a client in their own right.”
When it comes to investing, families need to work out how they can combine investing for both income now and growth later. Make sure your investment portfolio is geared not only to providing for your family’s current needs, but will also offer a decent retirement, says Mr Yearsley at Wealth Club.
Unless families have a large inheritance to fall back on, most of the increased costs of living will have to be met from income, he says.
“This group of people should definitely be concentrating on their own long-term savings and retirement pot for themselves with any spare cash invested either in Isas, pensions or more specialist areas like venture capital trusts.”
Ms Taylor at Aurea is clear what the squeezed upper middle should do. “If you have a long-term savings horizon, you need to get into the market,” she says. “Any investment into the stock market is going to be better than putting it under the mattress or into a bank account.
“You can’t really go wrong with a low-cost tracker investment.”
Higher-income families can expect little prospect of relief from the government as they feel the effects of an economic predicament that is, after all, a matter of personal choice in work, spending and education. But the message from financial professionals is clear: plan your finances carefully to make the most of what you have, as there’s no room for costly mistakes.
Retirement can wait
Hundreds of thousands of parents are putting their retirement plans on hold by up to eight years to make up shortfalls in their own pension saving, writes Josephine Cumbo.
The extent of financial pressures on older generations was outlined in recent research, which found a third of over-50s were planning to work longer than they had hoped when they were 40.
Chief among the reasons for retirement plans being delayed were inadequate pension savings, but lingering debts were also a key issue, according to the research by Aviva, the pension provider.
The second most common reason for working longer was concerns about the amount that would be available through the state pension, according to the survey of more than 500 employers and 2,000 employees.
“The report highlights that a lack of pension savings is the main driver for people staying in employment rather than retiring,” said Aviva.
Advisers say recent changes to pension rules could see even more over-50s carry on working beyond their anticipated retirement date, as they cannot afford to leave their jobs.
Reforms which came into effect in April last year gave those aged 55 and over full freedom to cash in defined contribution pension savings, with no expectation that they would buy a retirement income with their fund.