The end of service benefits are going to play a big part in finances of people in the UAE.
Old Mutual International and Quilter Cheviot surveyed 130 people living in the UAE (expats, Non-resident Indians and Gulf Cooperation Council Nationals) and found 69% are relying on gratuity payments to fund their retirement.
This is a 10% rise from the firm’s study in 2018.
Despite this increased reliance, on average, workers are expecting to receive just AED17,000 (£3,579, $4,629, €4,180) compared to an expected AED21,600 a year ago.
Around eight-in-10 UAE workers believe they will receive this type of payment when leaving their company.
Worrying
Paul Evans, head of region Middle East and Africa at Old Mutual International, said: “The global retirement landscape is dramatically shifting from one where someone’s retirement provision is the responsibility of businesses and the government to that of the individual.
“The fact that the average gratuity payment is now a relatively small figure is illustration of this change and it’s worrying that 69% of those surveyed are either fully or partly relying on this payment for retirement.
“Financial advice is therefore essential as people are typically reliant on their gratuity to invest into a business or the stock market as part of a phased retirement plan.
“Getting good advice can help someone get the most from their money, which is particularly important when speaking about relatively modest sums.”
Use
The most popular use for the payment is to invest the end of service money into a business (48%) followed by investing into the stock market (40%).
In the 2018 survey, just 18% of people said they would simply spend part of their gratuity and save the remainder, for 2019, this has now risen to 31% and is the third most popular choice.
Some three quarters expect to continue to work in retirement in some capacity either for social (40%) or financial (35%) reasons, and 75% believe that they will be doing this work self-employed.
Careful consideration
Mark Leale, head of Quilter Cheviot’s Dubai office, said: “Careful consideration needs to be given to suitable investments, particularly as employees move from a defined benefit environment to one in which their benefits are no longer guaranteed.
Here, the investment experience and knowledge of employees will come into play and a degree of financial education will be essential to ensure that these individuals make appropriate choices.
“The temptation may be to employ a very low risk, cash or fixed income strategy for their investments.
“However, given current yields, this approach is unlikely to keep up with inflation, particularly after costs.
“Some exposure to global stock markets will provide the potential for some growth and those with longer until retirement will often be prepared to take on a more equity-based investment option, as they have greater time to even out the fluctuations in markets, giving them the potential for a higher return on their savings.”
Recent news
On 18 November 2019, a consultation by the Dubai International Finance Centre (DIFC) looking to revamp the end of service benefit payments for employees in the centre closed.
The proposed legislation would mean that employers would be required to pay contributions into an employee workplace savings plan or alternative qualifying scheme, with workers able to make additional voluntary contributions.
Minimum contribution levels are to be set under this legislation dependent upon the length of an employee’s service.
Leale added: “With expatriates typically staying in the UAE for much longer during their working careers, proper funding of a pension type arrangement is essential to assist employees with securing their financial future.
“It is encouraging that the DIFC are taking positive steps to protect employees’ future benefits, providing a facility for them to make additional voluntary contributions and all within a well-governed environment.”
