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UAE end of service gratuity payment – save it or spend it?

March 23, 2014

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.”

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The Pensioneer Trustee Company (Guernsey) Limited is licensed by the Guernsey Financial Services Commission under The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 and subject to The Pension Licensees (Conduct of Business) & Domestic and International Pension Scheme and Gratuity Scheme Rules (No.2) 2017.