UAE: Why your gratuity is not enough as retirement fund

Finance experts explain how employees can save and invest their funds to maintain their lifestyles even after leaving their jobs for good

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Waheed Abbas

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Published: Tue 3 Oct 2023, 1:45 PM

Last updated: Thu 16 Nov 2023, 1:16 PM

Employees in the UAE tend to depend excessively on their end-of-service gratuity, and as a result, nearly half of the residents are yet to start saving up for their retirement.

This is according to a recent survey by Friends Provident International which revealed that 45 per cent of residents have not yet begun savings for retirement despite 44 per cent wanting to retire by the age of 55.

Personal finance experts warned that end-of-service gratuity may not last throughout an individual's retirement.

Gratuity is typically provided as a one-time lump sum payment, and while longer tenures in a company may yield large end-of-service payouts, such funds may not last throughout an individual's retirement – especially if they live for many years after leaving employment.

In September, the UAE Cabinet adopted a new system that allows employees in the private sector and free zones to invest their end-of-service benefits. It will be optional for employers to join. Employees’ end-of-service benefits will be invested in the fund, with multiple options offered.

It offers three investment options: risk-free capital guarantee; investments where risks vary between low, medium, and high; and Sharia-compliant investments.

End-of-service benefits and returns will be paid to employees when their work relationship with the employer ends.

Bas Kooijman, CEO and asset manager of DHF Capital, said it appears that people in the UAE depend too much on end-of-service gratuity probably due to the mindsets of many expats, who hail from countries that offer pension systems such as government-sponsored social security programmes, among others.

“End-of-service gratuity may be viewed as the alternative to saving for retirement by these expats even though it is not," he said.

A survey by Friends Provident International revealed that 45 per cent of residents have not yet begun savings for retirement despite 44 per cent wanting to retire by the age of 55.

He advised that at the end of the day, end-of-service gratuity shouldn’t be anyone’s retirement plan but rather a tool that is used to supplement their golden years.

Rupert J Connor, partner, Abacus Financial Consultants, said end-of-service gratuity should certainly not be considered a pension substitute nor be solely depended on.

“With almost no or minimal savings among a large portion of UAE residents, retirement saving remains a major issue for many expatriates who face the consequences of inadequate financial planning later in life,” he said.

How to financially prepare for retirement

Connor said retirement years can potentially last for well over 20 years so the amount received from a gratuity payout cannot sustain a similar lifestyle through those years, unless one is particularly frugal.

Kooijman said that as people age, their healthcare costs will likely increase. “Adding to this, inflation is constantly rising, and if you are accustomed to a certain lifestyle, maintaining it in retirement may be a priority for you. Therefore, while end-of-service gratuity will not be enough to serve all of these needs, a diversified portfolio can.”

He advised that by spreading investments across various asset classes such as stocks, bonds, and real estate, UAE residents will be able to mitigate the risk that comes with different assets performing differently based on market conditions while generating sustainable, regular income.

“In your normal day-to-day job, you must invest between 10-20 per cent of monthly salary. Furthermore, if you leave a job and receive an end-of-service gratuity, it is highly advised to invest this lump sum in its entirety to create cash flow later on.”

Additionally, he added that pension accumulation in most countries either stops or pauses when an individual works abroad. “So, this makes it doubly important for expats to save while living in the UAE as he may need to contribute to his existing pension plan and end-of-service gratuity can be used to do just that.”

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Alternative incomes for post-retirement period

Kooijman said freelance work is a common option for employees post retirement.

“When you spend the majority of your life working, it becomes difficult to let go of something that is a major part of your day-to-day. It’s why many professional athletes, for instance, struggle to cope with retirement. Part-time work allows you to scratch this itch while enjoying a more flexible schedule, enabling you to pass on your expertise, and giving you a little bit of extra pocket money.”

Connor suggested that in addition to well-diversified investment portfolio and rental properties, part-time jobs in post-retirement can also be an option

“Seeking professional guidance from an expert financial planner can provide the information and strategies required to make informed decisions, safeguard retirement income, and fully enjoy the adventures of life as an expat,” he added.

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