Never mind gratuity, pension plan a must

• Last Updated: July 09. 2009 1:59PM UAE / July 9. 2009 9:59AM GMT

Enjoying life after retirement requires regular savings and prudent investment. Bernd Weissbrod / Newscom

Few companies in the UAE have given serious thought to pensions and retirement plans for employees. In a way, it’s tough to blame them: there are so many advantages to working in the UAE – high salaries, no taxes – that retirement planning and pensions have long been a mere afterthought.

That, though, may be changing. Before the financial crisis, lots of firms in the UAE were busy stepping up their employee benefits packages to attract skilled workers from overseas. The global economic downturn changed that a bit – during trying financial times, companies started to cut benefits and even consider redundancies. However, the benefits industry in the UAE continues to mature, and you are still more likely than ever to receive a benefits package that includes a retirement plan and even some sort of pension.

Indeed, according to a recent survey by Zurich International Life, a large international insurer, 21 per cent of UAE residents said their employer provided a pension plan, a fairly healthy number for a developing country. Meanwhile, employers themselves do not appear to be targeting pension and retirement benefits to adjust to leaner times. A quarter of employers in the UAE said travel benefits and performance-based bonuses would be scaled down or withdrawn if they had to cut back during the crisis, according to the Zurich survey. Only three per cent said the pension plan would be axed.

Of course, a pension plan of sorts already exists in the UAE. Called a “gratuity”, this plan has been around since 1980, when the country’s first labour laws were enacted. As long as you have worked for a company for at least a year, you get 21 days’ worth of base salary per year worked – or 30 days of base salary per year worked if you have worked at the company for more than five years. This sum is paid out when you retire or resign from your job, and is calculated based on your salary at the end of service.

While this is a generous scheme, for most workers a gratuity alone won’t be enough to fund retirement. Also, many companies in the UAE appear to be underfunding the scheme, meaning the money you are owed might not be available for you when you quit your job or retire. According to a Zurich survey, 42 per cent of human resources managers in the UAE didn’t know their company’s strategy for funding gratuity obligations, and 22 per cent said they remain an unfunded liability.

If you think your retirement is being taken care of in the UAE, in other words, you might be wrong. Pension benefits are clearly picking up some steam, but the UAE still has a long way to go before a majority of workers are covered under modern, state-of-the-art retirement schemes. The situation is particularly uncertain for expatriates, who make up the majority of the country’s population; they, unlike UAE citizens, aren’t covered by various Government-sponsored pension plans.

Until that situation changes, the dearth of retirement benefits at UAE firms means that most expatriates must do the crucial work of planning, saving and investing for retirement themselves. And doing so isn’t easy.

In the absence of tax-advantaged savings plans like the 401(k) in the US or the Individual Savings Account in the UK, financial planners recommend that expatriates in the UAE start their retirement planning by trying to set aside as much money as possible. The absence of taxes in the UAE provides a convenient starting point: many advisers say one of the best ways to make up for a lack of employer-funded retirement plans is to calculate what you would have paid in taxes back home and try to save that much every month.

If you would have paid roughly 30 per cent of your salary in taxes back home, you should try to save that much here. With a salary of Dh20,000 per month that translates into Dh72,000 a year in retirement savings – not a bad start. Over 25 years, you’ll end up with more than Dh5 million, assuming seven per cent annual investment gains.

Needless to say, setting that much money aside in the UAE – or anywhere, really – will probably be a challenge. The temptations to spend here are huge: enough to eat up just about any salary. When their salary appears in their bank account, most people tend to view it as spending money without even thinking about long-term retirement goals.

Thankfully, there are numerous ways to defeat this tendency and make sure you’re on track for retirement, even in the absence of a well-funded plan at work.

The first and most obvious thing to do is hire a financial planner, although this route can be expensive. A skilled planner can help you sort out all facets of your finances, from fine-tuning your spending patterns to allocating assets in your investment portfolio and managing properties overseas.

Planners are most useful for people who have complex financial obligations and assets to deal with and for those who are approaching retirement and need to strategise and plan for how much income they can expect from their savings and investments.

Another way to defeat the spend-now-save-later tendency – and this one won’t cost a dirham – is to go to your bank and ask for a standing order to transfer a percentage of your salary to a savings account every month. Once it is in savings, you can decide how to spread the money around – how much goes to an investment portfolio, for example, and how much of it stays in savings to serve as a rainy-day fund (you should have from three to six months of spending money in this emergency fund).

Of course, most people who have got used to spending the money in their bank accounts (and not saving at all) won’t be able to tolerate a sudden spike in savings through a standing order. The remedy here is to start small and ratchet up over time. You probably won’t miss five per cent of your salary every month, so start there. Then, every three months or so – mark it on your calendar – ratchet it up by one or two per cent.

Alternatively, you can adjust up savings every time you get a raise or bonus at work, which ensures that your take-home pay won’t be any different than before. Either way, you’ll gradually reach your savings target without having to make any significant changes in spending.

Taking retirement savings seriously is crucial – especially nowadays, when people are living longer than ever, and especially in the UAE, where employer-funded retirement schemes are still in a nascent stage. Plan right and start early, though, and there’s no reason you can’t rack up some serious cash by the time you retire.

afitch@thenational.ae