UAE end of service gratuity payment – save it or spend it?
When Caitriona McBride quit her job as the director of business development for a photography company, she decided to spend her end of service gratuity in a way she believed would make her richer – on travel. Ms McBride, who now works as an author and playwright, received her last gratuity cheque last April.
“I booked a trip covering Asia – Sri Lanka, Thailand, Laos, Vietnam, Singapore and Malaysia, as well as Australia and New Zealand,” explains the 33-year-old, who is a native of Ireland. “I had worked at the photography company for two years and the gratuity money covered my flights – I got a round-the-world ticket with seven stops and I booked other flights along the way with budget airlines. The gratuity also covered most of my accommodation and spending money in the Asian countries, as the cost of living is very low there and I could stay in hostels for US$7 a night.”
Ms McBride is still travelling in Thailand and will arrive back in Dubai this month. She says that in the run-up to her trip she budgeted carefully, something that allowed her to spend on once-in-a-lifetime opportunities such as skydiving in New Zealand and visiting a koala reserve in Brisbane. “I feel I spent the [gratuity] money in the best way I could. If I could do it again, I definitely would. Travel is the only thing you can buy that makes you richer, and I’m lucky I had the opportunity. I understand people have different priorities, but I was careful with my money in Dubai so I took this chance,” she explains.
According to the UAE Labour Law, an end of service benefit (EOSB), or gratuity, is granted at the end of employment to any worker who has completed one or more years of continuous service. Jahangir Aka, the managing director of SEI Investments Middle East says it is calculated on an employee’s basic salary, earning them 21 days’ salary per year of service up to five years.
“For over five years it becomes 30 days a year. For shorter tenures, the rules allow for a tapered payout by companies. It is based on the basic salary plus commission, not on allowances,” he explains.
So the longer you have spent at a company, the larger the sum you will receive at the end of employment. The payout is capped at 24 months of service, although some companies remove the cap out of loyalty to a valued employee.
While spending her gratuity as soon as she received it was Ms McBride’s strategy, experts warn that many UAE residents don’t realise that EOSBs are there to act like a pension scheme. Historically, employees stayed with companies for a long time, making the gratuity an effective savings vehicle.
But with many now switching jobs every two to three years, the gratuity is often treated like a bonus rather than part of a long-term savings plan.
“Unlike countries with established pension schemes where the earliest benefits can be accessed is typically from the age of 55, a gratuity is paid when you leave the employer,” explains Andrew Prince, a financial planner at Acuma. “What this means in practice is that in most instances, temptation gets the better of us and the desire to treat the family, buy that new car etc proves irresistible. When it comes to planning your financial independence, this is the equivalent of two steps forward, three steps back.”
Like Ms McBride, Nick Rego, a 30-year-old Indian senior editor living in Dubai Sports City, decided to spend his gratuity on travel. Mr Rego received his last gratuity cheque in November 2011, after resigning from his job in an IT recruitment company where he worked for six years. He had another position lined up that began in January 2012, but wanted to take time out to reboot.
“I was seriously burnt out from the wonder that is corporate life and working a six-day week,” he says. “So I did the only sane thing and booked a 15-day Caribbean cruise for Christmas and New Year. I landed in New York on December 24 2011 and had the most amazing time of my life.”
When Mr Rego returned to Dubai he was ready to take on his new role and the remainder of his gratuity was deposited in his savings account, which he uses for rent and future holidays. “When I look back on what I had spent on my trip, which was approximately Dh15,000, I realise it was a sizeable amount that I could have invested or put into savings,” he says.
“But the mental and physical benefits that I got from taking that trip far outweighed the financial ones, so I looked at it as an investment in myself. I think any future gratuity I get will still go into my savings and investment, but I would reserve a portion of it to spend on something for myself.”
For others, a gratuity offers the perfect opportunity to pay off lingering debts. Khalid Khan, a 35-year-old Pakistani sales manager from Dubai received his latest gratuity cheque in January after quitting his job at a property company. Mr Khan, who worked for the organisation for more than four years, received a better opportunity elsewhere, so decided to change job positions. For him, there was only one option on how to spend the money.
“The majority of the gratuity went on debts such as loans, credit cards and other miscellaneous,” he says. “I used a lot of it to pay off my car fines and the registration of my car. To be honest, my gratuity was a saving grace. I have learnt my lesson and I think if I could I would have saved the majority of it in a savings account or possibly use it to invest in something.”
Abdulla Allam, an Egyptian senior medical representative, divided his gratuity into three chunks – one was used to pay off credit card debts, one to travel to London and the other was put into a savings account. The 28-year-old received his last gratuity payment in June 2013 after leaving a job he held for almost three years. “I felt that the money was wisely spent. I had a bit of fun, saved up a little, and settled my debts. I haven’t got anything specific planned for my savings, but I’m hoping to either invest in property back in Egypt or to open a small business of my own,” says Mr Allam.
However, for some UAE residents simply getting their hands on their gratuity allowance is an issue in itself. Some employers, keen to cut costs, try to bypass the law and withhold payment. But Mr Aka of SEI says gratuity malpractice can be resolved.
“Onshore in the UAE, the process is pretty simple and clear, through the Ministry of Labour, to file a case against the employer,” he says. “In DIFC, for example, there is the court of small claims that employees can go to. However, in many of the cases we have seen where the employee has been treated unfairly a short letter from a law firm often triggers the employer to do the right thing. Increasingly employers are becoming more aware of the risks to their reputation by treating employees unfairly, as more than the courts, the very ease of ex-employees being vocal in online forums can impact future recruitment efforts.”
Meanwhile Mr Prince says that individuals who do use their gratuity as a form of pension should not consider the amount they receive enough to comfortably sustain them through retirement. Instead he recommends a series of steps to save for the future.
“Set aide 10 per cent of your gross income into a diversified portfolio of mutual funds; after leaving your employer clear any debts and then invest your gratuity proceeds; invest in property that has a positive rental yield; and look at tax-efficient strategies to maximise your returns,” he adds.
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Updated: March 21, 2014 04:00 AM