UAE end-of-service gratuity vs a pension

This letter has been about long-term money: thirty-year bonds, and companies spending billions now on things meant to last decades. The same lens is worth turning on the end-of-service gratuity, which many people here build up over a working lifetime. It is a real entitlement. It is not a pension, and the difference matters well before you need the money.

Start with what it is. A private-sector worker who completes at least 1 year of continuous service earns 21 days' pay for each year up to 5 years, and 30 days for each year after that. There is a ceiling: “in all cases, the total gratuity shall not exceed the wage of 2 years”.

Then the part that catches people out. The calculation uses basic salary only — it “will not include allowances such as housing, transportation, utilities, furniture”. If your package is a modest basic plus generous allowances, much of what you are paid never enters the sum. Two people on the same total pay can end up with very different entitlements.

The bigger difference is what the money does while you wait. A funded pension is a pot: contributions go in, they are invested, and compounding does much of the work — which is why thirty years of contributions are worth far more than thirty times one year's. A gratuity is days of final basic salary multiplied by years served. It grows when you stay longer and when your basic pay rises, and in no other way. Nothing is invested, and nothing is added for inflation.

The UAE has built an alternative. Cabinet Resolution No. 96 of 2023 created a voluntary scheme in which an employer pays a monthly contribution into a licensed investment fund — 5.83% of basic salary below five years of service, 8.33% at or above it — instead of a lump sum at the end. The scheme is voluntary for the employer. For an employee the employer selects, joining is not. Whether it suits any particular person is a question for a regulated adviser, not for this newsletter. What is worth knowing rather than assuming is which arrangement you are in, and what your basic salary actually is — because that, not your total package, is what the calculation uses.