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29 March 2024

UAE expats who spent their gratuity on a Ferrari…

Published
By Alice Johnson

You’ve quit your job after 10 years and are heading back home with a nice lump sum; and you’re looking forward to buying that sought-after Ferrari in your retirement. But think again – spending your gratuity on lifestyle could be the worst mistake you ever made.

Leaving your job in the UAE with a nice lump sum in your pocket could be one of the best feelings in the world. So what are you going to spend it on? A big holiday to the Maldives, a new car, an expensive watch? Sounds great, right? While it might sound great, chances are it could end up being the worst mistake of your life.

For all UAE expat workers, getting a large gratuity at the end of your service is a ‘bonus’ worth looking forward to. But take care what you do with gratuity payments – this essentially is going to form your pension. A lot of people take their gratuity at the end of an employment contract, and simply think that they ‘don’t need to start saving yet’.

The intention of gratuity payments is to substitute any structured pension scheme. However, the lack of a structured retirement scheme often means people do not fully consider what will happen when they retire. People are living longer and the lack of government- or employer-support means that people need to rely on themselves.

Many think their living costs will go down in retirement, so they won’t need as much money. If you’ve been running a business in the UAE or abroad, you might also be lulled into a false sense of security; believing that profits from the company will see you through to old age.

All of these myths are – unfortunately – just myths. People often assume that they won’t need as much money during retirement, because their costs will go down; but this is not generally the case. Rising inflation and living costs, higher medical, nursing and accommodation costs will all add to the need for more income during retirement – not less. To solve this requirement for additional income, some even believe that they can just carry on working for longer, or get a part-time job after retirement. But who wants to work when they’re 70!

You might think that relying on your business to provide profits during your retirement is a brilliant idea. It might be on paper, but have you thought about how that’s really going to work in reality? Firstly, relying on your business for your pension fund is not 100% secure – what if your business stops turning a profit? The other point you might not have considered is how your new reliance on your business for an income will affect the bottom line. Speak to your shareholders and board members – they might not be as willing to accept it as you think.

According to the 2013 Global AgeWatch index, which measures pensions and retirement provisions, a surprising number of countries don’t give enough help to pensioners. The UK, for example, was ranked 13th worldwide; while India ranked 73rd population: at least two billion people are expected to be aged 60+, comprising more than a fifth of the world’s population, by 2050. This increasing number of ageing and elderly in the population will place . These figures are set to worsen, with an increasingly ageing an increased strain on Government-funded resources; especially pensions and benefits. The study was conducted by the UN Fund for Population and Development, encompassing 91 countries and 89 per cent of the world’s ‘older people’. Life expectancy in the UK is 80.75, while in India, it is just 65.48 years.

“There is a lack of understanding about how long people might live beyond retirement,” Andrew Dawson, Head of International Bank Distribution at Zurich International Life in the Middle East said.

“This is because people are living longer and healthier lives, meaning retirement lasts longer. Inflation can also hit savings and often there is misunderstanding about the global pension deficit,” he continued.

“People believe retirement is a long way off and believe ‘things will work themselves out’ before they need to worry about it. Sadly, this really isn’t the case,” Dawson concluded.

According to HSBC research, over half of the people in the UAE (53 per cent) feel that they are either “not prepared adequately” or “not prepared at all” for retirement. The research also found that in the UAE, people have acknowledged the need to save for retirement, although (as with many other emerging markets with young age profiles), they are being held back from doing so due to the costs of day-to-day spending (46 per cent). This, however, can lead to drastic problems later in life, as on average, people in the country expect their retirement to last for fifteen years, but their savings to only last for nine years.

Gifford Nakajima, Regional Head of Wealth Development, HSBC Bank Middle East Limited, said: External factors such as the unpredictable economic environment, in addition to people’s natural inclination to focus on short term needs rather than long term planning, can explain the inconsistency in their saving habits. However, we see that this lack of commitment to a financial plan will result in the majority of people facing a drastically reduced standard of living later in life. Hence, it is essential that people adopt a more serious approach to their financial planning methods, whether this involves taking the initiative by themselves or by working with a professional financial advisor.”

Here are a few simple steps to take, which will ensure you’re fully prepared for retirement:

• Think twice about blowing your gratuity on a Ferrari or that ‘must-have’ pair of designer

• Start saving early – don't put it off.

• Decide what age you’ll retire – how much money are you going to need?

• Look at your goals every year – will you need more money?

• If you’ve got investments, great, but make sure your portfolio is diverse.

• Be disciplined with your savings.

• Think of your monthly retirement allowance as a bill – not a luxury.

Case Study

Ahmed is 40 and plans to retire at 60. Ahmed aims to live on half of his current income when he retires. He earns $60,000 per year so needs a yearly pension income of $30,000. This means a lump sum of around $600,000 would be needed to provide the income of $30,000. With 20 years until he retires, Ahmed would need to save $1,712 per month to get the $600,000. This is 34 per cent of his current salary. However, if he’d started his retirement plan at 30, his monthly payments would be $896 which is 18 per cent of his salary – a substantial difference.