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Introduction to saving money while working in the UAE

October 20, 2017 Useful Articles

Turn your tax savings into an investment strategy

Tax-free wages mean tax savings; are you putting them to effective long-term use?

With its competitive remuneration packages and tax-free environment, it comes as no surprise that the UAE attracts millions of expatriates from over 100 countries. Consider for a moment that income tax in one’s native country could stand at anywhere between 10 per cent and 45 per cent, and saving while working in the UAE becomes a compelling proposition.

Regularly setting aside and investing tax savings is a good habit to get into and a sure-fire way to build up a healthy nest egg. Not sure where to park those hard-earned dirhams? Fret not because the UAE in general, and Dubai in particular, offers an array of investment and savings options to suit various risk profiles, financial goals and time frames, said Rabih Khalek, Head of Accident and Health and Unit-Linked – Fund Management at MetLife EMEA.

“From a simple savings account, private placements and managed accounts [to] open-ended mutual funds, an expat living and working in the UAE has the opportunity to select diversified and flexible options,” he said. “Strategies [may] vary, too, in terms of portability and being tax sheltered, [which] can be developed to accommodate people of various nationalities.”

Other avenues including real estate and alternative investments (for example hedge funds, commodities and derivatives) may also be considered, but bear in mind that these types of asset classes may not be converted into cash so quickly, which will leave investors assuming what is known as a liquidity risk, Khalek warned.

“Individuals can choose to have their money placed in cautious investment strategies if they do not like to assume risk. [However,] they should recognize that in the present interest rate environment, cautious and conservative strategies do not offer much returns, and the growth potential for their savings may be limited,” he added.

But those prepared to expose their savings to greater risk and who don’t mind tying up those funds, foregoing short-term liquidity, can approach specialized fund managers who can connect them with more exotic financial instruments.

Diversification is the name of the game

According to Dilip Manjunath, Senior Wealth Architect at Elixir Wealth Solutions and Compass Insurance Brokers, the cost of living in the UAE increases by three to five per cent every year, so if tax savings are not invested, expatriates’ savings tend to lose three to five per cent buying power annually.

“The best thing to do is to invest money in a diversified portfolio. Protecting your hard-earned [savings] from market fluctuations is [the] same as building [a] bridge with many pillars, so that if one pillar gets damaged, the bridge does not collapse. You simply cannot have all your eggs in one basket. Spread your investment across different instruments, different organizations and different countries,” he suggested.

Doing so ensures that, even if one asset class experiences turbulence, overall wealth remains relatively unaffected. “Do not put all your money in any one investment, no matter how good it sounds. If [diversified investing] is not your cup of tea, hire an expert to do it for you,” Manjunath said.

There are several investment instruments available in the market today that can be tailored to your specific needs and risk level, with some even providing protection for you and your loved ones. Life insurance products are ideal for this specific purpose. They not only offer life coverage or financial security for your family if something were to happen to you, but part of the premium can also be invested in one or a combination of various investment strategies to help beef up your coffers.

Depending on the type of life insurance that you acquire, you may also have the option to borrow against the cash value of your policy for any immediate financial need. In addition, riders can be purchased and added to your policy, ensuring extra layers of defense for your hard-earned cash.

Assessing risk appetite

Before making any investment decision, expatriates would do well to determine their risk appetite, according to the experts.

“When it comes to risk and reward potential, it is critical for each person to take a realistic look at her or his tolerance to risk,” said Khalek, who added that there are two main tracks to follow in determining an investor’s risk appetite.

The first track is generally related to the investor’s age and the length of time he or she wishes to keep the money invested or saved; the goals set in terms of what the money is intended for; the budget allotted to savings or investments; and the availability of diversified investment instruments to help achieve the goals.

“And the second equally important attribute [track] is [the person’s] capacity for sustaining losses,” he emphasized. “Expatriates’ primary goal is to fly back home with a decent [nest egg] that can sustain their lifestyle. The approach people with various risk tolerance levels take is to maintain the ‘cushion’ that can support in adverse market conditions. This cushion should grow further as one nears the end of the savings duration and the timeline to maintain the capacity to generate further savings gets shorter.”

Manjunath believes that an expatriate’s “capacity for loss”, and “investment goals” are important, but he also maintains that “personal attitude to risk is hard to measure and [may change] – what feels comfortable one day, may not be [as comfortable] the next day”.

Khalek agrees, adding that each individual may have unique needs and special circumstances.

“It is therefore recommended that expatriates seek professional financial advice and review their financial needs regularly in order to remain on course towards their goals, and [become] aware of the changes and developments that affect their financial status,” he said.

Credits: Metlife UAE