By Courtney Trenwith
Pension plans are not common in the Gulf, so it is essential for employees to plan ahead, says Courtney Trenwith
Most of us dream of spending our retirement on a beach, travelling the world, or finally having time to do that hobby we so love but never seem to get around to. But few actually sit down and calculate whether we will be able to afford such a utopian end to life.
Let’s face it, there are so many other immediate demands on our budgets - the ever-rising price of housing, schooling, and bills, not to mention possibly experiencing even just a week of those retirement dreams right now. As we turn off yet another morning alarm, retirement seems practically a lifetime away.
But that is just the point: while we have four, five, six decades to earn sufficient income to survive those later, salary-free years, the majority of workers fail to plan ahead. Yet, the earlier we start, the less painful it is to deduct a monthly retirement deposit from our salaries.
For expats in the GCC, the onus of planning for a pension is more acute, with most not entitled to regular employer contributions. In most cases, companies will pay out an end-of-service lump sum worth several weeks’ pay, according to the employee’s length of service and salary.
That is not exactly unfair, but the problem arises when the employee fails to save or invest the money for retirement, typically because they believe their immediate financial needs are more important or they do not have the financial literacy to plan for the future.
EY’s GCC Wealth and Asset Management 2015 report revealed last week that the GCC had only $397bn in public pension funds, equal to a quarter of GDP or $15,000 per national. That compares to some developed countries where employer-provided pension funds have assets valued at more than the that nation’s entire GDP, while funds per individual are nearly four times the GCC average.
Gulf governments are reviewing existing models of both public and international pension funds, as they attempt to rein in public spending amid low oil prices.
In my home country, Australia, compulsory employer-contributed superannuation (at 9 percent of an employee’s salary) has become an unquestioned part of an employee’s compensation package. The country now has $1.7 trillion in pension fund assets, which employees can either manage individually or leave with the employer’s nominated firm.
I admit that in my twenties I opposed superannuation until a certain age, perhaps 30 or 35. I argued that young people already struggled to buy a home — a far more urgent necessity than retirement, especially for a 20-something who has barely started their working life. I still believe my point was valid, although there probably did need to be some sort of oversight of the 9 percent employer contribution to ensure it was indeed spent on purchasing a property.
But superannuation is so engrained in the Australian psyche that no one would now argue against it. In fact, some are pushing for it to be increased. The employer contributions are made pre-tax, so unless an employee reads their salary slip each week they would, presumably, not miss the money. But, oh, they would miss it if they reached 65 years and were unable to retire, or in the style they had dreamed of. As the saying goes, you won’t miss it until you don’t have it.
Such pension schemes are not common in the GCC, but there is nothing to stop workers from taking on the responsibility themselves. Setting aside even 5 percent each month — particularly if deposited into a long-term interest account — will most likely be a fine reward when it finally becomes time to leave the office for good.
But beware 'wealth management' experts charging large hidden fees, and also leaving it all to the government who may have other priorities by the time you retire. I think buying a property is the right priority - at least that stays under your control and always has a residual value. Today many pensioners who have saved hard are finding the actual pension payouts are too low to live on because annuity rates have slumped along with interest rates. Those with a roof over their head seem generally better off.
Buying a property is usually a good investment, as long as you have done your homework on property valuations for now and the future, any tax considerations if you plan to sell, and inheritance considerations. But yes, owning the property gives you the roof over your head for your retirement. Now then, how are you proposing to have the income during retirement (maybe 30-40 years) that will buy you food, pay utilities, cover medical expenses, generally have a decent quality of living??