Most expatriates come from an environment where their pension is established and administered by their employer. Many have had no involvement with their pension other than stating whether they wanted to make additional contributions to their company scheme.  Consequently, it is not surprising that many overlook their retirement planning when they move offshore.
 
Others are of the false impression that their gratuity will make up for their pension contributions or that their State pension will suffice. Some others plan to use a second property as their retirement ‘pot’ but have no back-up plan for if they cannot sell or rent the property.
 
Identifying The Potential Problem
Retirement is expensive - and many spend a quarter of their life in retirement! Whilst it is likely that the mortgage will be paid off, there are still utility bills to pay, food to buy, a car to run, grandchildren to spoil and substantially more leisure time in which to keep oneself amused.
 
Bearing all this in mind, one has to ask oneself several questions?
 
•       How much would I need if I were to retire tomorrow?
•       Taking inflation into account, how much am I likely to need when I am 65?
•       How much gratuity will I receive? Will this cover these costs long-term?
•       What other savings and pension arrangements can I use in retirement? Will these cover my likely

        outgoings for 20+ years?
•       What is the shortfall and how am I going to make this up?
 
Gratuity
The gratuity rules change slightly from country to country in the Middle East. However, one consistent fact is that gratuity is not a pension plan and it will not fund your retirement.
 
Using the UAE as an example, the law states that an employee shall receive:
 
1)     21 days wages for each year of the first five years.
2)     30 days wages for each additional year on condition that the total of the gratuity does not exceed two

         years wages.
 
Consequently, even if you are lucky to be earning AED 60,000 a month and you work for a company long-term, the maximum gratuity you receive will be AED 1,440,000.  f you resign, gratuity is likely to be reduced and the company may only be obliged to pay you 1/3 of what would otherwise be due. If the company goes bankrupt, they may not physically have the money to pay you your gratuity entitlement!
 
Now, AED 1,440,000 may initially sound a lot of money, but if we break this down a little we can see that it is woefully inadequate to retire on.
 
AED 1,440,000 equates to US$ 391,500. At current yields, this is likely to provide an income of AED 70,000 or US$ 19,500 per annum. Some may argue that they could just about live on this but it would mean they would have to forsake all luxuries and leisure activities.
  
Additionally, if they have 20 years until retirement, everything is likely to cost 3 times as much due to inflation. This means their gratuity money will provide a monthly income with the buying power of AED 1,950 or US$ 540 in today’s terms!
 
The Importance Of A Pension
Even if you plan to have a relatively modest retirement, you are likely to need an income of US$ 3,000 per month today. Those planning on living life to the full during retirement are likely to require double this.
 
If you retire in 10 years, inflation alone will increase the income required for a modest retirement to US$ 4,000 per month.  In 20 years, you will require US$ 5,400 to have the buying power of US$ 3,000 today.
 
Consequently, for a luxury retirement, someone who is currently 45 is likely to need a monthly income of US$ 10,000 per month!
 
Whilst a portfolio of property can generate such an income, what happens if you cannot rent or sell all the properties when you need the income? As with all investments, the number one rule of retirement planning is to never keep all your eggs in one basket.
 
How Much Do I Need To Save?
Now that we have an idea of how much income will be required in retirement, we can calculate the size of the ‘pot’ we will need to build to generate this income.     
 
If you are retiring in 10 years, to generate an income of US$ 4,000 for the remainder of your life, you will require a pension pot of US$ 680,250. For the dream retirement, it is likely you will require savings at retirement of around US$ 1,500,000.
 
For those retiring in 20 years, a pension pot of US$ 1,000,000 will be needed simply for a basic retirement.  However, whilst those with longer to retirement do need to build a larger pot, they do have longer to build this pot and, as we will see, time is a good friend when it comes to pension planning.
 
The Cost Of Delay
The cost of delaying the savings process will have a huge effect on the amount you need to save to build this pension pot.
 
We cover this in more detail in another article but, to build a pension pot of US$ 1,000,000 in 25 years, would require monthly savings of US$ 1,850. By delaying saving by just 5 years (or not making contributions for 5 years whilst an expatriate) would result in the same person having to save US$ 2,670 to meet the same goal.
  
For someone starting to save for retirement with just 10 years of working life left, they would need save an incredible US$ 7,000 per month to reach the same goal. This simply would not be a feasible option to the average person. That said, it is better to start saving something now than not bother – the State is not going to help you out!
 
So What Can I Do?
Firstly, it is worth ascertaining whether your employer has a company pension scheme which you can contribute to. More and more employers’ in the Middle East are realising the benefit of corporate pension schemes in attracting and retaining employees.
 
If not, there are a variety of personal expatriate pension schemes available to individuals. Most of these are international plans which allow you to contribute (and take the benefits) regardless of where you are resident in the world.
 
Expatriate pensions can be set up with monthly contributions as low as US$ 150. Pension terms can range from 5 to 30 years. Many of these pensions do not have the stipulations of their onshore equivalents – such as the compulsion to purchase an annuity or a stipulation of how much of the pot can be taken as a lump sum.
 
If you have existing frozen pension benefits, it may be possible to transfer these to a more favourable jurisdiction too. For more information on this, see our articles on Qualifying Recognised Overseas Pension Schemes (QROPS).    
  
Choosing A Pension Plan
There are a variety of pension plans available to expatriates and it is important to choose the policy which is best suited to your personal circumstances.
 
Always choose a pension scheme that allows you to reduce or suspend contributions temporarily. You do not know when you will need the extra cash due to losing a job, moving countries or having a child.
 
When choosing a policy, look at the enhancements, does the scheme offer extra allocation for saving more? Does it give loyalty bonuses for continuing contributions? Also look at the fund selection. Does the scheme offer direct access to the investment funds or do they offer Mirror Funds which will involve an additional (often unseen) layer of charges.
 
Other points to look out for are whether there are additional charges; ask whether the pension plan charges for paying by credit card (often the easiest way for an expatriate to pay) or whether there are penalties for reducing or suspending contributions.
 
Lastly, ask for an estimate of the reduction in yield figures; i.e. how much does the policy have to grow by each year to cover the charges? If you are saving over a term of 10 years or more the reduction in yield should be little more than 1% per annum – or even less for larger premiums and/or longer terms.
 
This is a simplified overview of what you should be looking at in a policy. An independent financial brokerage, such as Candour Consultancy, will have access to all the pension plans in the marketplace and will be able to advise which scheme is most economical for you and your personal circumstances.
 
Candour Consultancy are authorised representatives of all the major offshore pension providers and can advise on the most suitable product for your personal circumstances.

To speak to one of our fully qualified consultants, simply click here or call us on +971 4 312 4410.