A new ‘golden’ pension scheme designed to help expats save for retirement has opened in the United Arab Emirates.
The pension aims to close the financial gap between the 44 per cent of expats who want to retire by the age of 55 and the 45 per cent who have no retirement savings.
The problem has been worsened by a massive influx of expats following the relaxation of visa and residency rules.
The UAE has the Arab world’s second-largest economy, behind Saudi Arabia, and has attracted many skilled expats who want to retire to the country.
Around 9 million people live in the UAE – but 85 per cent (7.65 million) are expats.
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What Is The Golden Pension?
The golden pension was introduced on October 11, 2022, by National Bonds, a savings and investment firm backed by the Dubai government that provides a range of financial planning products and services for UAE residents, including expats.
Key points include:
- Members must be an employee at a registered company.
- Employers can contribute lump sums to cover their end-of-service gratuities or make regular deposits to cover any gratuity owed when the employee retires.
- Employees can make additional contributions, from AED 100 (£24.13) per month deducted directly from their salary.
Pension savers can adjust their contributions, provided deposits are made monthly and above the minimum value, and earn returns on their savings in addition to any contributions made by the employer.
The benefit for businesses is that, in heavy competition for skilled professionals, a subsidised pension scheme may prove an attractive benefit and improve staff retention with long-term financial advantages for employees with extended years of service.
Enrolled members can also add life cover to their policy through the takaful system, whereby all contributors share the risk equally and donate to a fund that invests according to principles, excluding anything considered gambling.
Businesses are assured that they have set aside the funds required for end-of-service retirement benefits, earning low-risk interest on the balance, or making ongoing deposits towards their employee’s retirement.
Pension Provision In The UAE
There is a significant disparity between incomes, wealth, and security in the UAE. In addition, while large numbers of the population are expats, the social security system excludes them from claiming most government benefits.
The General Pension and Social Security Authority (GPSSA) was founded in 1999 to provide pensions and social security benefits for UAE citizens. The pensions are paid past working age or when someone cannot work due to injury or disability.
Foreign nationals are not covered, and any residents who are not citizens of Gulf Cooperation Council (GCC) countries have little, if any, access to any social security schemes.
Emirati citizens can claim retirement benefits from the age of 49 if they work in government or private sector roles or after 20 years of service.
End-of-service pay is a standard entitlement for nationals but is only offered to expats with occupational benefits.
The standard gratuity is calculated as 21 days’ wages for every year of work or 30 days’ pay for every year after five years of employment.
The norm is for expatriates to contribute to a workplace or personal pension.
Businesses that join the golden pension scheme will guarantee end-of-service gratuities and additional pension benefits by depositing the anticipated value into the fund or making monthly contributions.
Employees can make regular deposits from their payslips or transfer savings into the pension scheme if they wish.
Potential Impacts Of The UAE Golden Pension
The golden pension scheme is not a government programme. Uptake will depend on how many employers choose to enrol.
The scheme may prove beneficial because most expats in the region face complex decisions about whether to return home on retirement, the costs associated with private pension schemes, and the drawbacks of remaining in the UAE.
Mohammed Qasim Al Ali, National Bonds CEO, said that the scheme addresses a gap in corporate investment in end-of-service payments, where “not many companies do this, which deprives employees of these benefits”.
The hope is that the golden pension scheme will encourage retiring expats to stay in the UAE. It may also attract new expatriates who may have been reluctant to relocate due to the risk of damaging their eligibility for state pension benefits at home or the complications of transferring pension funds to an alternative such as a QROPS or SIPP plan.
HMRC approves Recognised Overseas Pension Schemes (QROPS), where UK citizens can transfer their pension funds without tax penalties, but the scheme does not cover the UAE.
Self-Invested Pension Plans (SIPPs) are another option commonly used by expats. Still, they attract fund management fees and usually require a wealth manager or investment advisor, which can be costly.
Fund investments through the golden pension scheme comply with Shariah law and preclude investments in sectors such as gambling or those linked with high-interest-rate borrowing.
Golden Pension Scheme Limitations
While this product is promoted as a pension, it works more like a long-term savings plan, helping employers accrue wealth to use towards end-of-service gratuities rather than a defined contribution or defined benefit scheme, which is more familiar in the UK.
However, the option of employees making discretionary contributions does mean they could treat the fund as a retirement savings asset and deposit a proportion of their income into their plan, as with an auto-enrolment pension fund.
One relatively large employer with 9,000 staff has joined the scheme in the weeks, although it remains to be seen how many corporations choose to participate.
UAE pensions work primarily on lump-sum end-of-service benefits rather than ongoing pension income, so there are limitations on what the fund can offer if the employee does not make their contributions and if the employer covers only the minimum required gratuity.
Foreign nationals need to seek professional advice to ensure that the benefits will be enough to cover spending if they rely on a golden pension fund or another occupational pension scheme to fund their retirement.
There is no UAE state pension for foreign nationals, so many may wish to continue to pay into private pension schemes with a guaranteed or contribution-based return intended to provide financial security throughout their retirement years.
UAE Golden Pension FAQ
Most employees are entitled to pension benefits if enrolled in a workplace scheme, from age 50 or after 20 years of service, whichever comes first.
Individuals working in the private sector or government roles can claim a pension from age 49 or following 20 years.
The difficulty is that, aside from workplace pensions or private pension funds, foreign nationals are only normally eligible for social security support and qualify for the national pension fund if they are Emirati nationals.
UAE employees can join the scheme through their employer – the organisation will need to enrol staff before they can start making contributions.
Employers can choose to make contributions toward employee pension funds and might offer this as an incentive, additional form of remuneration and as a staff retention policy.
Scheme members can contribute savings or rely on deposits made by their employer, with direct deposits starting from AED 100 (£24.13) per month.
National Bonds has a rewards programme worth AED 35 million (£8.46 million), and individual contributors will be enrolled in the scheme with the potential to win prizes such as cash and cars.
There are two tiers of withdrawal. First, employees can withdraw funds they have contributed to the scheme whenever they wish and without restrictions – including any interest earned.
They cannot withdraw contributions made by the employer without permission from the company. Depending on the employment contract, employers will need to authorise access once the staff member retires or leaves their employment.
The scheme was based on proposals made in March 2022 by the Crown Prince of Dubai, who sits on the Executive Council as Chairman.
He proposed that UAE employees should have a pension programme that safeguards employee rights, allows foreign nationals resident in the UAE to increase their savings, and ensures that end-of-service benefits are protected.
One of the underlying drivers may be that many expatriates relocate back to their country of origin on retirement due to the lack of pension income – some will only be eligible for a state pension scheme once they repatriate.
By introducing a golden pension scheme specifically aimed at foreign nationals, the hope may be that the overwhelming proportion of expats in the UAE chooses to stay, contributing to the economy through taxation, property ownership and economic spending.
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