Introduction
End-of-service benefits (EoSB) are a mandatory financial payment made by an employer to an employee upon termination of employment in the United Arab Emirates (UAE). These benefits play a crucial role in the country’s labor landscape, providing financial security for employees at the end of their service.
In the past, EoSB in the UAE were calculated based on the employee’s last basic salary and years of service. However, this approach had limitations, particularly in addressing issues like long-term savings and investment opportunities.
What changed in September 2023?
In September 2023, the UAE government introduced a new voluntary alternative end-of-service benefits savings scheme. This reform aims to provide a more flexible and sustainable approach to ESB, offering several key features, including:
Current shape of EoSB
The new reform on the voluntary contributions offers a more flexible approach to ESB, allowing employees to choose how much they contribute and how their contributions are invested.
The amount of Mandatory EOSB an employee is entitled to is calculated based on their basic salary and years of service. The formula for calculating EOSB is as follows:
EOSB = (basic salary * years of service) / 3
For example, an employee with a basic salary of AED 10,000 and 10 years of service would be entitled to an EOSB of AED 33,333.
EOSB is paid to employees who terminate their employment for any reason, including voluntary resignation, termination by the employer, or retirement. In the case of termination by the employer, the employee is also entitled to severance pay, which is calculated based on their basic salary and years of service.
In addition to the mandatory EOSB, employees in the UAE are also eligible to make voluntary contributions to their EOSB savings. These contributions are made to a savings account that is managed by a licensed fund manager.
- It can help employees to increase their savings and secure a more comfortable retirement.
- It can give employees more control over their EOSB savings, as they can choose the investment options that are right for them. Third, it can help employees to reduce their tax liability.
How to Make Voluntary Contributions
To make voluntary contributions to EoSB savings, employees must first open an EoSB savings account with a licensed fund manager. Once the account is open, employees can make contributions to the account by direct debit from their salary or by making a lump-sum payment.
The amount of the voluntary contribution is up to the employee. However, there are some restrictions on the maximum amount that can be contributed.
For example, employees who are covered by the Public Pension System (PPS) are only allowed to contribute up to 10% of their basic salary to EOSB savings.
What are the investment options available with voluntary contributions?
The investment options available to employees who make voluntary contributions to EoSB savings vary depending on the fund manager. However, there are typically a range of options available, including:
These options provide a guaranteed return on investment, offering a lower risk profile.
These funds adhere to Islamic principles, catering to employees who prefer investments aligned with their religious beliefs.
These funds offer a balance of risk and return, catering to employees with varying risk preferences.
What is the tax treatment?
Voluntary contributions to EoSB savings are tax-deductible up to a certain limit. The maximum deductible amount is AED 10,000 per year for employees who are covered by the PPS.
