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Pensions

Q1)

I am currently working for company that provides a final salary scheme for my pension at retirement. Should I take this into account when calculating my Zakat?

A final salary scheme is a defined benefit pension scheme in which the pension holder never secures ownership of the pension contributions prior to receiving the pension payments. Therefore, you do not need to pay Zakat on the company's contribution until it finally comes into your possession when the pension matures.

Q2)

Regarding pensions: if you are NOT able to dictate how your pension assets are invested, do you pay Zakat on this? For example, I work for the NHS and each month part of my pay goes towards the NHS pension scheme - I do not have a say in how this is invested.

Even if you cannot determine exactly how the assets are invested, but if they are being invested on your behalf and you are able to determine a specific value of funds that are attributable to you, then according to the view of the Al-Qalam Shari'ah Panel, the pension is subject to Zakat.

How much is then paid depends on the nature of the assets in which the funds are invested. If they are invested in shares/equities, then you can safely assume that 40% of the value of the funds is subject to Zakat. If cash, then 100% is subject to Zakat.

Q3)

I was hoping you could shed some light on whether or not it is applicable to pay Zakat of my pension. If so, how is the calculation done in case I don't have access to knowing how much pension I have saved. My workplace has a pension scheme where they invest my pension for me.

NZF advocates the view that Zakat is payable on money purchase and/or defined contribution schemes. The point here is that although there is no access, one has effectively allowed/volunteered to cede control to an investment manager with the express motivation of growing a portfolio on behalf of oneself. So there is clearly wealth that is subject to growth and it is a definable pot of specific investments with a definable value, effectively held in the individual's name regardless of whether the employer or employee contributed.

That said, Zakat is never due on the market value - this would only be the case if you could sell your pension assets which you can't of course.

That's why it's important to know what the investments are composed of in order to be able to calculate Zakat accurately. Some Shari'ah compliant investment funds are based around property/rental investments only, in which case no Zakat might be due. If stocks and shares, then Zakat is due on the proportionate ownership of cash and other Zakatable assets in the underlying companies and we advocate using 40% of the market value as a proxy for the proportion of Zakatable assets in the firm. e.g. £10,000 of shares in one's pension. Zakat would be due on £4,000, so £100 to pay. If part of the pension is held in cash, then Zakat would be due on all of that portion, minus the interest of course. As an aside, the Shari'ah compliance of the investments is of course critical to determine.

You are permitted delay payment of the Zakat on your pension assets for all of your years prior to retirement until your pension matures and you start to receive funds from it. It is however preferable where possible to pay for each year as you go along from other assets if possible.

Q4)

I am confused about Zakat on pensions. The two types of pensions I'm looking at are

  • 1. Employer+Employee pension. Deducted at source. I.e not in my possession. Cannot be touched or taken until age 65.

  • 2. State pension in the UK which residents are entitled to. I have no idea what it will be but it is being accumulated via my National Insurance contributions.

My questions:

  • 1. Is Zakat due on these pensions now even though I am unable to access this money for 40 years or so and what I get in future may be different to my estimate since the personal tax on pensions has changed in the UK and will probably change again?

  • 2. Or do I wait until I receive the money (Allah knows best) then pay Zakat at that point.

  • 3. If the answer is 2. then is that retrospectively?

How is that possible for say state pension?

You can ignore the state pension because as you said it's undefinable in its value.

NZF advocates the view that Zakat is payable on money purchase and/or defined contribution schemes. The point here is that although there is no access, one has effectively allowed/volunteered to cede control to an investment manager with the express motivation of growing a portfolio on behalf of oneself. So there is clearly wealth that is subject to growth and it is a definable pot of specific investments with a definable value, effectively held in the individual's name regardless of whether the employer or employee contributed.

That said, Zakat is never due on the market value - this would only be the case if you could sell your pension assets which you can't of course.

That's why it's important to know what the investments are composed of in order to be able to calculate Zakat accurately. Some Shari'ah compliant investment funds are based around property/rental investments only, in which case no Zakat might be due. If stocks and shares, then Zakat is due on the proportionate ownership of cash and other Zakatable assets in the underlying companies and we advocate using 40% of the market value as a proxy for the proportion of Zakatable assets in the firm. e.g. £10,000 of shares in one's pension. Zakat would be due on £4,000, so £100 to pay. If part of the pension is held in cash, then Zakat would be due on all of that portion, minus the interest of course. As an aside, the Shari'ah compliance of the investments is of course critical to determine.

You are permitted delay payment of the Zakat on your pension assets for all of your years prior to retirement until your pension matures and you start to receive funds from it. It is however preferable where possible to pay for each year as you go along from other assets if possible.

Q5)

I wanted to ask a question regarding Zakat payments due on a SIPP (Personal Pension). I am a contractor and so took it upon myself to take about a pension about 11 years ago. The first 7 months it was in a standard HSBC Stakeholder pension fund as I didn’t know it wasn’t halal and didn’t realise halal funds where available. After I realised, I switched it to an Amanah Fund. It only became clear to me recently that I need to pay Zakat on this pot of money. I’ve been trying to work out how much I owe.

My question is twofold:

  • 1. How do I cleanse the profit gained in the first 7 months where it was not invested in a Sharia compliant fund.

  • 2. Is it correct that the simple method for working out how much Zakat is due is to take 40% of the pension pot value each statement year and then apply a 2.5% zakat on that? So for example if my pension is worth £10k now, I would only pay £100 ( (10,000 x 0.40) x 0.025)

  • 1. The way to purify your wealth for the first 7 months is simply to work out what capital appreciation, if any, occurred on the original amount you put into the impermissible fund before you transferred it all into the new fund and then to give that amount away as Sadaqah or voluntary donation.
    E.g you invested £5,000 originally then 7 months later this was worth £5,500 when you moved to HSBC Amanah. You should cleanse by paying £500 Sadaqah.

  • 2. The 40% rule is a proxy for those who own shares via a pension fund or as a long-term investment who are unable to determine the Zakatable assets of the underlying firms in which shares are held. Based on preliminary research, 40% is used to approximate safely for the value of the Zakatable assets of a firm as compared to its market value.

  • So your calculation on the figures you have quoted would be correct.

  • We hope to produce further detailed guidance on this matter in coming months insha'Allah, including a specific calculation for the HSBC Amanah index.

Q6)

At the moment I am paying into NHS pensions. I am a GP and have control of the money that I pay in BUT cannot withdraw any amount once I have paid it. Secondly NHS pension scheme does not invest our contributions. Does this mean I have to pay Zakat NOW and also when I start draw my pensions?

In terms of the Zakat treatment of the NHS pension, then there will not be any Zakat payable if it is a final salary scheme. Further information on this is contained in our Pensions article [link to Knowledge page for pensions]

Q7)

Does Zakat need to be paid on pension assets?

  • i) There is no Zakat due on National Insurance contributions. If one is receiving payments from a government pension, then one simply needs to factor in the residual cash in possession on the Zakat due date.
  • ii) If one has 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 Shari'ah compliance of such schemes and further advice should be sought on this matter.
  • iii) If one has a money purchase scheme, which is nowadays the most common, then the view of the scholars that advise NZF (the Al-Qalam Shari'ah 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.

Q8)

Why does Zakat need to be paid on these pension funds when one has no access to them?

In this case, one has effectively allowed/volunteered to cede control to an investment manager with the express motivation of growing a portfolio on behalf of oneself. So there is clearly wealth that is subject to growth and it is a pot of specific investments with a definable value, held in the individual's name. Even though one does not have complete possession, the characteristics of such schemes have lead scholars to conclude that they fulfil sufficient criteria to be considered Zakatable.

Q9)

How do I calculate Zakat on pension funds?

Zakat is almost never due on the entire quoted value of the pension fund. This is because the amount of Zakat that needs to be paid is determined by the nature of the underlying investments, which is usually stocks and shares.

In this case, Zakat is due on one's proportionate ownership of the net Zakatable assets of the companies in which investments are held. Normally this is calculated by finding out which stocks are owned, how many shares are owned and then by using the company balance sheets to work out roughly what the Zakatable assets are in each firm.

If it is difficult for this to be determined then a recommended rule of thumb is simply to take 40% of the current market value of the portfolio as a proxy for the net Zakatable assets of the underlying companies and then pay 2.5% of this figure.

e.g. if the portfolio is worth £10,000 and held entirely in stocks and shares, take 40% which is £4,000 and then 2.5% of this which would be £100.

This rule of thumb was extracted after NZF conducted some analysis on the balance sheets of listed companies and compared their likely net Zakatable assets to their market values.

Note that some Sharia compliant investment funds are based around property/rental investments only, in which case it is possible that no Zakat might be payable.

If part of the pension is held in cash, then Zakat would be due on all of that portion, minus the interest of course, which should eventually be given away entirely.

Q10)

Does the Zakat on pension funds need to be paid straight away?

If the relevant amount of Zakat can be paid on an annual basis then this is preferable. However, it is permissible to wait until funds are realised upon retirement and then pay the Zakat that has been noted down from previous years at this point. Although permissible, this approach may of course lead to a significant build up in Zakat payable by the time one gains complete access to one's pension funds.

Q11)

How do I calculate Zakat on pension funds?

Zakat is almost never due on the entire quoted value of the pension fund. This is because the amount of Zakat that needs to be paid is determined by the nature of the underlying investments, which is usually stocks and shares.

In this case, Zakat is due on one's proportionate ownership of the net Zakatable assets of the companies in which investments are held. Normally this is calculated by finding out which stocks are owned, how many shares are owned and then by using the company balance sheets to work out roughly what the Zakatable assets are in each firm.

If it is difficult for this to be determined then a recommended rule of thumb is simply to take 40% of the current market value of the portfolio as a proxy for the net Zakatable assets of the underlying companies and then pay 2.5% of this figure.

e.g. if the portfolio is worth £10,000 and held entirely in stocks and shares, take 40% which is £4,000 and then 2.5% of this which would be £100.

This rule of thumb was extracted after NZF conducted some analysis on the balance sheets of listed companies and compared their likely net Zakatable assets to their market values.

Note that some Sharia compliant investment funds are based around property/rental investments only, in which case it is possible that no Zakat might be payable.

If part of the pension is held in cash, then Zakat would be due on all of that portion, minus the interest of course, which should eventually be given away entirely.

Q12)

Does it make a difference whether the contributions are from the pension holder or an employer?

Once the funds have been paid into the pension pot, it does not make a difference who made the contribution. The entire pension pot now belongs to the pension holder and therefore it all needs to be considered for Zakat purposes.

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