Zakat on pensions

Oct 18, 2023 | Zakat (Charity)


Salam, There are 2 parts to my question. 1. With my current employer I have a defined contribution pension plan where the employer contributes 10% of my salary into a pension pot managed by standard life which invests the money and I can only access that money once I retire. I want to know: a. The current value of the plan is £5000 do I calculate zakat simply as 2.5% of 5000. b. Do I have to pay zakat now or when I take money out of the pension pot when I retire. c. If I start making payments into the pension pot from my monthly salary, how would that impact the above zakat calculation. 2. I have no choice in where the pension provider invests the money that my employer pays into my pension pot. What is the opinion of scholars from taking the actual sum paid by the employer and the amount of increase in value due to investment. Thanks


Defined contribution schemes are zakatable. The pension value represents the value of the underlying investments. In order to calculate zakat one would have to identify the composition of zakatable assets within the underlying investments and then pay zakat accordingly. One may use the following proxies which have been worked out by Mufti Faraz Adam to determine the composition of zakatable assets. Shariah funds: 26% Direct property fund: 15% Equity fund: 27%  Mixed asset fund: 50% Bond/gilts/fixed interest fund: 100% of invested capital only. Example: If a person’s pension fund is worth £10,000. 50% of the fund is invested in equity funds and 50% in property. The zakatable percentage of the equity fund is 27% hence one would calculate 50% * 27% = 13.5%. The zakatable percentage of the property fund will be 15% hence the calculation for the other half of the pension fund will be 50% * 15% = 7.5%. The total zakatable assets will be 13.5% + 7.5% = 21%. Hence, of the £10,000 only 21% is zakatable assets which is £2100 and they will pay zakat of 2.5% which is £52.50. If the fund is investing in unlawful products such as bonds then only the capital invested is lawful to take back and zakatable. Any increase from those investments will be unlawful to take and not subject to zakat. Zakat due on your pension can be paid once you retire and have access to your pension. We would advise making a note each year of that years zakat calculation and mentioning it in your will that you have outstanding zakat to be paid so that your inheritors can discharge this duty in the event that you were to pass away before retirement. Any additional sums added to your pension fund will be subject to zakat according to the method explained above. 2. Three aspects of your pension are lawful for you to take. Contributions made from your wage, any sums added by your employer and returns on lawful investments as mentioned above. Returns on unlawful investments must be disposed of by way of charitable donations to the poor without expecting reward. Answered by: Ifta Research Fellow Checked & Approved by: Mufti Abdul Rahman Mangera Mufti Zubair Patel