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Pensions

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.

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

Zakat must be paid on pension funds because a pension is gathered with the sole idea to grow and then be paid out to the individual when he or she wills – for monetary purposes. Even though one does not have complete possession of his / her pension funds, the characteristics of such schemes have lead scholars to conclude that they fulfil sufficient criteria to be considered Zakatable.

How do I calculate Zakat on such pension funds?

Zakat is never normally 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 (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.

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.

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.

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