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Video: Zakat on pensions - Imam Abid Khan
Zakat is payable in full on pensions received after retirement. For monies set aside for pensions prior to retirement, Zakat is only payable if the pension assets are being invested on behalf of the pension holder and if there is a specific quantum of wealth attributed to the pension holder. This is the case in money purchase schemes but not in final salary schemes. The Zakat liability will then be determined by the nature of the investment such as property or shares. Please note, if pension monies are able to be invested, care should be taken to invest in a sharia complaint investment.
Does Zakat need to be paid on pension assets?
This depends on the type of pension in question. The following will help you further:
1) There is no Zakat due on National Insurance contributions. If you are receiving payments from a government pension, then all you need to do is factor in the residual cash in possession on your Zakat due date.
2) If you have a final salary scheme, then no Zakat is due since there is no quantifiable or specific amount of wealth being held in the name of the pension holder. However, scholars have questioned the Sharia compliance of such schemes and further advice should be sought on this matter.
3) If you have a money purchase scheme, which is nowadays is the most common, then the view of the scholars that advise NZF (the Al-Qalam Sharia Panel) is that such pension schemes whose fund value is determinable and where the funds are being invested on behalf of the holder are subject to Zakat. Examples of money purchase schemes include SIPPs as well as pensions offered by private sector employers.