By Mazen Abukhater, Head of Retirement for Mercer in the Middle East
Despite the financial draw of working in the UAE, a lack of retirement benefits can create problems including unexpected costs for expats later in life. Proper planning is essential.
Many expatriates are drawn to the UAE due to the country’s numerous financial advantages, such as no income or corporate tax, high salaries, and the relatively low cost of living compared to other major global commercial hubs.
According to Mercer’s 2018 International Geographic Salary Differentials Report, the UAE, along with Venezuela, Angola and Switzerland are the highest-paying locations in the world across all career levels.
While this might seem like a dream come true for expats seeking financial security, many who come to the UAE are often unprepared for the financial demands of retirement. A recent YouGov survey reveals that, in the Middle East, only 20% of participants are confident that they are saving enough for a comfortable retirement, with 9% being very confident.
In the UAE, expats cannot participate in local social security and retirement pension plans, and are often excluded from such plans in their country of origin. While UAE employers offer the standard end of service benefit as a replacement to retirement plans, this payment does not meet the financial demands for retirement. Indeed, 80% of UAE residents believe that the end of service benefit does not provide enough funding to cover retirement expenses, according to a YouGov survey. Additionally, Mercer’s Total Remuneration Survey shows that less than 10% of companies in the UAE provide a savings plan to employees.
Lastly, many UAE expatriates are unable to benefit from the ‘5th pillar’ of retirement planning according to the World Bank’s 5 pillar model – owning a home. High upfront costs and restrictions on foreign property ownership in the UAE lead many expats to rent homes rather than purchase them, preventing them from using a home as a ‘nest egg’ to fund their later years.
All of these factors contribute to a gap in retirement planning for UAE expats, a gap which individuals and organizations can work together to address through proper planning. We outline three initial steps below:
Put the right plan in place and stick to it!
Individuals working in the region need to be proactive in planning for their retirement, which can be a challenge in the UAE with its many consumer attractions. The UAE has done an excellent job in marketing itself globally as a tourist destination, with a huge list of must-dos and must-haves; be it cars, jewelry, concerts, restaurants, and more. This ‘living in the moment’ culture has led many expatriates to spend rather than save in the short term.
Assess the amount of income you need for relocation and retirement (specifically home ownership)
As a general rule, people need to replace two-thirds of their income to maintain the same standard of living in retirement. However, this rule assumes that an individual has paid off home ownership while working, which may not apply to UAE residents returning to their home countries. A 2016 propertyfinder.ae survey shows that 70% of UAE residents rent their properties while in country, rather than buy. This creates the need for individuals to budget for their housing when relocating back to their home countries, in addition to standard retirement costs. The prudent approach would be to assess the required income needed at retirement and develop a plan as early as possible to achieve the needed target amount.
Work with a professional to manage your retirement investments
Long-term investing for retirement is already a major ordeal – the additional complexities of working in the UAE makes this even more challenging. Rather than go it alone, expats should consider engaging a professional to help them navigate retirement planning. When evaluating advisors, individuals should ask the following questions:
- Does the advisor offer best-in-class investment funds, managed by professional institutional investors?
- Do they offer flexible member choices based on risk appetite, voluntary contributions, and accessing funds for major life events such as purchasing a home?
- What is the cost structure compared to competitors? Do they require upfront costs and ongoing fees?
- How robust is their administration platform?
- Do they offer a streamlined approach to setting up the plan and ‘onboarding’ employees as smoothly and seamlessly as possible?
In following these steps, expats can best prepare for retirement and ensure they are maximizing the value of their time in the UAE.