Anyone who has visited a pensions adviser will be familiar with the shock of realising both how much retirement costs and how much needs to be saved regularly in order to fund it.
With costs of living rising everywhere, especially in the rich world, with people living longer and expecting to be active and financially comfortable well into their seventies, and with pensions advisers often employing conservative estimates of future growth, the end result can be that an adviser may suggest that you have to save up to 30 per cent of your salary per month, or even more. For most individuals, that will be impossible; for families, it can seem like a dream. Many, therefore, will leave the adviser and save nothing, assuming that it is pointless to try.
This situation offers a powerful example of how psychology plays a role in financial planning, especially for the long term. As part of The National’s series on personal finance, we reported yesterday on how a staggering 75 per cent of those surveyed, both Emiratis and expatriates, were failing to save adequately for retirement.
Of course financial planning is primarily a responsibility for individuals. In countries where citizens pay tax, the government may make saving for retirement more appealing through tax incentives. That does not apply to the UAE, in large part because the expatriates who work here will not retire here.
And yet there is an incentive for the Government to be involved. Look again at yesterday’s survey and 86 per cent of expats transferred money to their home country. That is money that is leaving the UAE. If that money were instead invested in some sort of state-backed provident fund, that would allow the money to remain in the country and be invested back into local businesses.
The scheme could go further. At the moment, end of service gratuities are paid by companies when employees leave. But companies don’t know when their employees might go, making it difficult to plan. If instead of an end of service gratuity, employers invested a percentage of the employee’s salary per month into the state-backed fund, it would have several advantages.
First, companies could plan better, knowing exactly how much they are paying out per month. Employees would benefit, because that money would automatically go into a savings fund that they could access when they leave. (Conceivably, employees could also top it up, allowing them to increase their contributions.) And the Government would benefit, because there would be more money available to be invested in the country.
Planning for retirement is difficult for individuals and families around the world. But innovative policy can have a beneficial effect on the finances of both workers and the Government.