Pay rises can make you worse off

Pay rises and bonuses can be bad for you financially – and that’s official. New research from Prudential shows millions of British adults admit to running up debts by spending pay rises and bonuses before they have them.

The savings and investment giant has identified a new group of people dubbed “Money Illusionists” – so-called because they overspend ahead of pay increases and bonuses with the result they end up worse off.

And it’s a huge group – around 17% of British adults, (equivalent to 3.4 million people) – admit to spending money they are due as a pay rise or bonus before the funds have been paid into their accounts, with 9% admitting to having run up debt averaging £1,414 each, (equivalent to £2.49 billion), over the past five years in anticipation of a payout from employers.

City high flyers might be celebrating after a bumper bonus round but for many of the rest of us it’s a life of “money illusion”, Prudential warns, with nearly one-in-ten of Britons saying they have spent pay rises or bonuses only to find that the money they actually receive is less than they anticipated.

Prudential’s Business Insurance Director, Angus Maciver said: “Pay rises and bonuses ought to be the answer to most people’s financial prayers but in many cases they appear to be putting people further into debt. A pay rise or a bonus ought to be the trigger to get debt under control but too many of us simply see it as an excuse to spend more.

“It is particularly worrying that so many people appear focused on gaining ‘pleasure now’, spending increases and windfalls rather than saving. As Britain’s consumer debt levels continue to grow it is vital that people make provision for good times and bad and we strongly encourage consumers to take financial advice and ensure that they have sufficient protection to enable them to weather any loss of income, as well as enjoying any increase.”

On average, Britons say that a pay rise or bonus only lasts for two months before expenditure increases to match the new income, with 30% saying it lasts them just a month and 18% saying it lasts just two weeks.

Less than a quarter (23%) of Britons say they have used bonuses or pay rises to pay off debts, despite the UK having unprecedented levels of consumer borrowing, with just 15% saving or investing the money and a mere 3% increasing their pension contributions.

In contrast, 19% spent the money on a holiday, 13% on home improvements, 12% of consumer electronics, 11% on jewellery and clothes and 8% on partying and nights out.

But despite these pay-rise and bonus-fuelled spending sprees, less than half (48%) of Britons say they have savings or insurance to tide them over in the event of job loss.