Emergency Pot
How Should An Expat in the UAE Setup Their Emergency Funds? - James Swash
Recently we wrote about how to structure yourself financially as an expat in the UAE and spoke of the ‘3 pots’ guide of your expenses pot, emergency pot and investment pot. A few weeks ago we wrote a follow up specifically on the ‘Expenses Pot’ and how an expat in the UAE should manage their expenses.
As described, there is no right of survivor-ship in the UAE meaning assets are not passed to the surviving spouse. Instead, assets of a deceased person will be distributed as per sharia law which favours male relatives.
Additionally, local accounts may be frozen if you are called to a court order or change employers.
As a follow up, we will talk more about the “Emergency Pot” specifically.
The Emergency Pot
Keep enough but not too much – 3 months expenses or 6 months expenses
As we described in our previous Blog post, we recommend keeping a maximum amount of funds here of 1.5 months of your expenses in your UAE current account due to issues mentioned above. Anything over and above 1.5 months expenses should then be moved OUTSIDE the UAE to your ‘emergency pot’.
Calculating your emergency pot:
As we explained previously, if your monthly expenses are aed20,000 then keep a maximum of aed30,000 in your local UAE account (1.5 months). Anything above should be put into your emergency pot up to 3 month’s salary. So if your salary each month is aed30,000 then this would be aed90,000. Given your emergency pot will provide you little to no return, anything above aed90,000 in this example, should be invested to achieve growth and to ‘inflation-proof’ your wealth.
Emergency Pot Options:
Expats may use the following to place their emergency funds:
-
Establishing an Offshore bank account
-
Existing Account
-
Mortgage offset account
-
Cash Based ETF’s
​
​1. Establishing an Offshore Bank Account
There are more than 300 offshore accounts for UAE residents to choose from, according to the money comparison site Souqalmal.com.
These typically offer 24/7 phone and internet service and multi-currency accounts across a range of currencies including GBP, Euro, USD and the Australian Dollar to name a few. To mitigate currency risk you should establish the account in the currency you will most likely spend it in. For most expats who are on an assignment overseas for a few years before wanting to return home should choose an account accordingly.
2. Existing Home Based Account
Alternatively you may use your home based bank account as your emergency pot, however if you do send money back home, ensure you have a justifiable reason as to why you are doing so. e.g setting up an investment account, sending money back for a mortgage repayment etc.
Issues typically arise when you send regular surplus funds back home and leave these amounts sitting in a bank account. This behavior may present an opportunity for the regulators to question your behaviors (one of the tests for non-residency) and in turn your residency status.
3. Mortgage offset account
A mortgage offset account is an excellent option for your emergency funds, as the capital is not subjected to market risk just like the current account options above, meanwhile it also effectively provides you an ‘investment return’ from the interest repayment saved on your mortgage. The ‘return’ is effectively the same as the interest rate. For expats who are currently making a negative net rental return on their investment property, that is, the rent they receive is less the interest repayment, then keeping your emergency funds in a mortgage offset will reduce or eliminate the negative deficit.
Ordinarily if you were a tax resident at home, a negative return is a tax effective strategy as it helps lower your accessible income and hence your tax payable. However, as an expat, it is unlikely you will have any other income to deduct this loss from.
4. Cash-Based ETFs
For the more adventurous of heart, you may wish to invest these funds to obtain growth, particularly if you don’t have a mortgage offset account to utilize. It’s important that you try to avoid market risk with your Emergency Fund however, as it’s there to protect you and your family in the event of an unexpected occurrence, such as a job loss or health concern, thus something lower risk, such as a cash-based Exchange Traded Fund (ETF), may be an option. This may improve the overall returns on your cash held, but it’s important to do your research here and ensure that you’re not taking on unnecessary additional risk.
General advice warning.
The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.