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High salaries, white sand beaches, multi-cultural environments, no-income-tax and a glamorous lifestyle, what’s not to like?
If it seems too good to be true, it probably is
Everything in life has a price. For expats in the Middle East, the price for this extravagant, picturesque lifestyle may not be obvious upon first glance.
No representation, without taxation
When you live in a country which has 0% income tax, you have to accept there is a trade-off. By paying no tax and increasing your income, you are surrendering the conventional benefits you would receive in a country where tax is charged. This blog explores how – unless you take direct action – living in a tax-free country can be detrimental for your long-term financial security.
When you pay tax, you are paying into a collective pool, from which you can draw certain benefits including;
Free education for your children
Free health care at the point of use
Retirement provisions including your pension
Unemployment benefit should you ever require it
Free or discounted use of public facilities i.e. swimming pools & gyms
When you live in a tax-free country, you are likely to have to pay for all of the above. Historically, much of the above was included in people’s employment contracts. However, according to Rohini Gill, a partner in a Dubai-based HR management firm “The UAE is no longer considered the hardship post that it was before, so you are no longer getting the big packages including extra money for school fees, health insurance, housing and so on. With the high cost of living here, it’s not making as much financial sense for a lot of people to be here any more.”
Widespread wage stagflation and a noticeable decline in employee benefits, has caused added financial pressure for many within the working population.
When you live in a tax-free country, desirable schools are usually very expensive, requiring significant savings. Historically, most employers would cover this cost, however, this is a declining trend.
Living overseas also often means your children will lose ‘home student’ tuition fee rates when they reach university age. International students currently have to pay £27,000 per year to attend UK universities, on top of other costs including accommodation, travel and living expenses.
Most companies provide basic health insurance packages, however, should you become seriously ill and become unable to work, it is important you understand how long your company will continue to support you. Will your health insurance continue indefinitely?
In the UAE, for example, employees are entitled to a sick leave of not more than 90 days per year, subject to conditions stipulated in the law. Employees will receive full pay for the first 15 days, half pay for the next 30 days and no pay for the subsequent 45 days.
If you contract a serious illness, for example, cancer, and become unable to work, after 45 days of sickness, you are no longer legally entitled to receive pay. How would you be able to cope financially in this case? Would you have to move home? Would you have anywhere to live?
If you lose your job whilst living in the gulf, you will either have to find a new one or leave. You will not receive financial aid whilst you look for a new job and if you are living paycheck to paycheck, you may find yourself in a very difficult position.
Many countries in the Gulf, including the UAE, have no automatic pension legislation in place. This means that whilst you are resident unless you take direct action, you will not be paying into a pension scheme. It can become very easy to delay taking action by saying ‘I will start saving next month’. This approach leads many expats to eventually leave in a worse financial position than when they arrived.
If you spend a prolonged period of your career without making retirement provisions, you are inflicting serious damage to your long term financial health.
When you live in a tax-free country, you are likely to command a higher salary than what you would expect at home. However, with your increased salary, comes increased responsibility, and if you act in a financially irresponsible way, you are likely to create a number of problems for yourself in the future.
When you pay tax, you can generally benefit from a social welfare system. However, when you live in a tax-free country you have to create your own safety net. You cannot rely on the government to be there for you in times of difficulty.
In order to do this effectively, you need to take hold of your finances and operate with discipline. deVere’s advisers can assist you with all elements of the financial planning process. With effective financial planning, you can ensure that when you eventually leave the Gulf, you can leave in a strong financial position ready for your next chapter.
To book a complimentary financial planning consultation, click here.
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