Q: Why are defined contributions Zakatable during the contribution period?
A: Zakat is due on defined contribution schemes due to the following reasons:
1: Zakat is binding on all Zakatable assets in one’s ownership
Ownership is a primary condition for Zakat obligation. In a defined contribution scheme, the pension scheme member has ownership of the funds. The funds are registered in his name and specified for him. Another indication of ownership is the assumption of risk. The pension scheme member bears the risk of the performance of a defined contribution scheme.
2: Zakat is payable on productive wealth
Zakat is binding on wealth which is productive according to all four schools of jurisprudence.
Productivity in terms of Zakat refers to the potential of an asset to grow and increase. Productivity of an asset can be intrinsic as is the case with gold, silver and cash. Productivity can also be realised by trading and investing into Zakatable assets. And finally, productivity can be established through the breeding of flock.
Besides these three causes, the Sharia has not recognised any other cause of productivity. Personal assets and belongings which may appreciate will not be Zakatable despite growing in value as they are not productive wealth in Zakat terms. Considering pension contributions, they are invested into Zakatable assets for capital appreciation, growth and increase. Therefore, the Zakatable assets in the pension fund are productive wealth and Zakatable.
3: Access is determined by the ability to effect an increase and invest
If one can do this without having current physical access to money, then the money is Zakatable. For the purpose of Zakat, access to the pension fund is only required to be able to effect an increase by way of investment. However, as the funds are already invested, physical access to the pension fund and the ability to withdraw at present are no longer required. Considering this, it becomes clear why Zakat is due on an investment in a fixed deposit Islamic account where physical access is restricted. In contrast, money deposited as collateral is not Zakatable as it is not invested on one’s behalf and nor can they effect
an increase as there is no access to it.
4: Access and control of the pension fund is realized through the fund manager
The Sharia principles of Wakalah (agency) confirm that access has been established to the pension fund for the scheme member via his fund manager. A member has the discretion to select a fund manager of his choice to represent him and manage the investment on his behalf. The delegated fund manager has access and control of the assets in the pension fund. In this case, one has effectively allowed/volunteered to cede control to a fund 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.
5: Pensions are another type of investment albeit with a longer investment term
Zakat is binding on the underlying Zakatable assets in investments such as shares, equity funds, unit trusts and savings accounts with fixed-term deposits regardless of the
term of investment.
Pension is just another type of investment albeit with a longer term than most investments. Generally, a pension cannot be unlocked prematurely. This does not mean a person does not have to pay Zakat; the inability to withdraw funds earlier than the date of maturity does not impact the ruling of Zakat. The nature of the pension plan is a long-term investment where the maturity date is upon retirement. Hence, it has the same rulings as any other form of investment. Thus, just as other investments which are locked for a term are Zakatable, pensions, which are locked for a longer term in favour of the pensioner, are Zakatable.
6: Zakat is binding on salaries which have been possessed directly or indirectly
Pension contributions are part of one’s salary. Zakat principles state that Zakat is not binding on outstanding salaries, however, Zakat is binding on salaries which have been possessed. A pension member takes possession of the contributions indirectly through the fund manager he delegates to manage the pension fund.
And Allah knows best!
Mufti Faraz Adam