If you have been living in the UAE for even a few months, you must have heard the term end of service gratuity benefit. Irrespective of your depth of knowledge in this matter, read on to understand the various aspects associated with end of service gratuity in the UAE, the current problems with the existing system and how you can grow the gratuity benefit to be able to retire comfortably.
What is the difference between pension and end of service gratuity?
We often confuse ourselves with pension and end of service gratuity, so, let’s start by addressing the differences first. An end of service benefit (EoSB) is money a government or corporate employer pays an employee at the end of service to the employer. However, in the context of UAE, it’s pretty much always the corporate employer who pays the end of service benefit.
Pension and end of service gratuity are both different types of End of Service Benefits. That being said, while a pension is paid in periodic installments in perpetuity to a retired employee, an end of service gratuity (EoSG) is paid once as a lump-sum at the end of the employee’s service.
Do Emiratis and expatriates in the UAE get end of service benefits?
Yes. Currently, the UAE government mandates all employers in the UAE to have in place end of service benefit plans for all their employees. However, while a UAE citizen is entitled to an employer-funded pension once he/she reaches the age of 49, or has worked for at least 20 years, an expat is entitled to an end of service benefit (In the form of end of service gratuity) after completing at least one year of service. However, the end of service gratuity keeps accumulating as an employee spends more years working for a company.
What are the potential issues with the End of Service Gratuity?
For an employer, the payment of end of service gratuity is a financial liability risk, because they may not have the money to pay it when the gratuity is actually due to be paid to the employee at time of the employee’s departure from the company. Worse, the employer may already be out of business by then causing non-payment of gratuity anyway. Though this is a big risk, companies in the UAE, in general, are not known to be keeping the end of gratuity amount owed by the employee secured at the bank.
According to the UAE Ministry of Economy, there are more than 338,000 private companies in the UAE. A 2019 Willis Towers Watson Middle East End-of-Service Benefits survey revealed that 88% of these companies in the region don’t plan and fund end of gratuity liabilities but pay them as and when due. This exposes the corresponding employees to the risk of non-payment of end of service gratuity when it’s actually due.
Even if the end of service gratuity is paid in full, for an expat going into retirement, the amount is often not enough to sustain the rest of the life. The amount just keeps accumulating over the years, however, never invested into the market for obtaining higher returns.
Out of the estimated 5.2 million expats work in the UAE, around 76% don’t save any savings for the retirement (Based on a 2018 survey conducted by HSBC Bank) and this reaffirms the need of creating a big enough corpus through end of service gratuity for expats which can let them sustain the rest of their lives upon retirement.
The Big Question – How do you grow the end of service gratuity amount?
The simple answer is by investing the gratuity amount as soon as your company contributes towards your gratuity. It never helps to keep the amount sitting idle in a retirement account with zero or minimal return of interest on top. You should always invest the gratuity amount on either stocks or commodities or mutual funds or fixed return deposit accounts, based on your risk appetite.
Investment, Risk Appetite, Corpus, Gratuity – all these terms may become overwhelming if you are not really aware of how the market works. That’s exactly where a trusted financial advisor such as FinFlx comes into picture. Let your gratuity grow as you leverage the expertise that FinFlx brings to ensure when the moment of retirement comes, you have enough accumulated gratuity that can ensure a nice life for you after your retirement.