GRAPH 1B
Finance
Gratuity vs Savings Plan Value over
GRAPH 1B: GRATUITY VS SAVINGS 20 Years
PLAN VALUE OVER 20 YEARS
5 5 “Late investor” – contributes nothing
for 10 yrs and then AED 10,000 pa
for last 10 yrs. 500,000
5 5 All assets assumed to be invested at
an average return of 6% per annum. 250,000
There are two main reasons why
0
sole reliance on the gratuity is not
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
to be advised and the first is that
a recent survey* found that 87% of
Gratuity
Savings Plan
UAE companies do not “provision”
or “set aside” the funds for it, relying
instead on monthly cash flow to cover
GRAPH 1B - Assump1ons: 20 year 1me period with a salary of AED 15,000 PCM with a contribu1on rate of 5.8% (
payments as and when staff leave.
DIFC has indicated that it expects
The Dubai International Financial
This is 8.2% (> 5 yrs service). The growth rate on gratuity contribu1ons is nil, and on savings, plan assets are 6% per annum
possible because whilst there is
an all-in cost (including underlying
Centre (or “DIFC”) is first out of the
a legal obligation to “pay” the gratuity,
investments) for their official savings
blocks, having announced its intention
there isn’t a reciprocal obligation
plan of up to 1.5% per annum, whilst
to replace gratuities with an employer-
to ensure it’s “funded”. This could
other
well
known
international
funded savings plan for all 23,000
become an issue should an employer
jurisdictions, such as Jersey in the
plus DIFC based employees from 1st
find itself in financial distress, and this
Channel Islands, can offer schemes
Jan 2020. Not to be left behind, the
can happen even in the education
for less than 1% per annum. Both
Federal Authority of Government HR
sector**. In all such situations, any
of these outcomes are a significant
have also submitted proposals to the
individual or creditor of a company in
level below what traditional expat
UAE Federal Government, supporting
default would find the money owed to
individual savings plans cost and this
broadly similar aims in the rest of the
them to be at risk of non-payment.
reduction in fee load, results in higher
UAE, although any potential outcomes
However, there are changes underway to the gratuity system which will benefit expats ac
moves towards the idea of replacing it with savings plans instead. A “savings plan” is sim
version of a “pension”. Due to an absence of income tax, there is no relief on contribu1on
but on the flip side there are then no restric1ons on accessing the funds (such as a minimum
The Dubai Interna1onal Financial Centre (or “DIFC”) is first out of the blocks, having announ
net returns to investors.
from their recommendations are not
yet known***.
replace gratui1es with an employer-funded savings plan for all 23,000 plus DIFC based emp
From an employer perspective, these
changes can also be viewed positively
Ultimately, this could be good
2020. Not to be le; behind, the Federal Authority of Government HR have also submi 5 yrs
service). The growth rate on gratuity
contributions is nil, and on savings,
plan assets are 6% per annum net.
and such a plan can be used as an
alternative to gratuity or, as an interim
step, could simply be structured to
help facilitate employees to save on a
voluntary basis, funded by deduction
from salary. In either scenario, the
employees benefit from lower charges
than an individual savings plan would
incur, such as financial adviser charges
and bank transfer fees, whilst the
corporate savings plan can also be
more inclusive by removing minimum
monthly contribution limits that might
otherwise exclude lower earners.
Using an employer-sponsored savings plan can also be more efficient than if individuals ch
and such a plan can be used as an alterna1ve to gratuity or, as an interim step, could simp
References:
help facilitate employees to save on a voluntary basis, funded by deduc1on from salary. In
However, there are changes underway
to the gratuity system which will
benefit expats across the GCC, with
moves towards the idea of replacing it
with savings plans instead. A “savings
plan” is simply a more flexible version
of a “pension”. Due to an absence
of income tax, there is no relief on
contributions into the scheme, but
on the flip side there are then no
restrictions on accessing the funds
(such as a minimum retirement age).
*Willis Towers Watson, End of Service Benefits
in the Middle East, 2018
** Khaleej Times, “School in Dubai to shut down,
over 200 students affected”, 27/06/2019
***FAHR Press Release, “FAHR considers
mechanisms for creating a savings fund for
expatriate employees”, 09/05/2019
Philip Rose has worked in financial services for over 20 years and is the founder
and a director of Halwyn (www.halwyn.com), which builds and distributes both
retail and corporate savings products. Halwyn is licensed and regulated in the UAE
by the Emirates Securities & Commodities Authority (license number: 301040) and
also in the UK by the FCA (license number: 816564).
After the Bell
Term 1 Sep - Dec 2019
51