'Gratuity not enough for retirement': UAE experts explain how 'golden pension' can help expats

With the new 'Golden Pension' scheme rolled out for employees in the private sector, expatriates in the UAE will be encouraged to start planning for their retirement, financial experts have said.

"This is a step in the right direction," said Rupert James Connor, partner at Abacus Financial Consultants.

The Golden Pension — offered by the Sharia-compliant savings and investment company National Bonds — allows employees to contribute as little as Dh100 on a monthly basis and earn a profit on the amount saved. It can be availed in addition to the earned gratuity provided by their organisation.

“Before this, in this part of the world, one had to make their own retirement provisions," Connor said.

"We help set up accounts for our clients and they contribute on a monthly basis. In a place like the UK, companies have to provide with a pension scheme by law. That is beginning to happen in the DIFC, and now this scheme has come in."

Setting aside funds for such pension scheme is a must to build a decent retirement life, he stressed.

“Gratuity is not going to be enough for retirement," Connor said. "You have to separate the risk profile from the need to save. The earlier start, the better...because that’s going to cost you less. If you start when you are 25 or 30 it’s going to cost you less as compared to when you are 45 or 50. You are also invested in the market for a longer time. Staying invested and being diversified are important.

"If you are in your 30s and you still haven’t got anything in place, then either set up something yourself or seek advice from a trusted advisor.”

Experts say this new initiative — designed especially for the private sector — will not only help expats invest in their future but will also support companies' employee retention strategies.

Vijay Valecha, chief investment officer at Century Financial, called this new pension scheme "innovative", saying this can lead to stability from an employee's perspective.

"It is innovative in the sense that National Bonds will be working directly with the private sector companies to help with their employees' retirement planning," he explained.

"However, handling retirement-related programmes is a big headache for the management, accounting and HR teams. More often, it leads to disputes also. So, the involvement of National Bonds is a long-term positive, since it will lead to more stability from an employee perspective and will improve the overall environment inside companies by removing uncertainty.”

Several studies have revealed that many UAE expats don’t do enough to ensure a decent retirement life, with many relying only on their gratuity.

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Planning for retirement entails several factors: from identifying income sources to sizing up expenses, implementing a savings programme and managing one's assets and risks, financial gurus said.

Valecha added: “When it comes to retirement planning, it’s essential that one shouldn’t put all their eggs in one basket. Spreading the retirement portfolio across a few different investments helps reduce risk. Diversification ensures that if one investment goes under, the others continue to work in your favour."

Expats, he said, should consider a mix of the different asset classes, "such as savings accounts, fixed deposits, onshore and offshore investment schemes, equities".

"Retirement annuities promise lifetime guaranteed monthly or annual income for a retiree until their death. These annuities are often funded years in advance, either in a lump sum or through a series of regular payments, and they may return fixed or variable cash flows later. Annuities can be great for those who need extra income in retirement," Valecha said.

Passive income streams have also become popular options to grow one’s income. “These can be in the form of investing in mutual funds or real estate, or other side hustles in which the individuals don’t have to actively participate."

Unlike active income, passive income provides residual income with minimal time and effort. The additional cash flow improves one's personal finances, making people more confident about their future.

“Approximately 70 per cent of the population in the UAE lives in rented houses. A huge opportunity for property owners is to generate passive income depending on an investor’s objectives and time horizon," Valecha pointe dout.

"Investors who buy and hold rental property as a long-term investment may be able to generate high returns on investment. Dividend stocks are one of the simplest ways for investors to create passive income. Investors who want to generate a consistent passive income should stick to the ones that fit the dividend aristocrat label, which means the company has at least a 25-year track record of paying out substantial dividends.”

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