Ramadan is almost upon us and is usually the time when most Muslims pay their zakat for the year. To make things easier for you, we are doing a series on how to calculate zakat on different asset classes.
In this article, we will break down and demonstrate how to calculate your zakat due on any pensions that you may have.
Is zakat due on pensions?
This depends on the type of pension you have. In summary, yes for workplace pensions and SIPPs, and no for final salary schemes until you receive the money. More on this below.
These are schemes that both you and your employer contribute to, with the intention of growing your investment in order to cash out at retirement. If your pension is invested in an equities fund (i.e. in stocks and shares), then you should pay zakat on this amount.
Simply take 25% of the pension pot value and pay 2.5% on that. Here’s our guide where we break down in detail how to do this.
Note: please do what you can to ensure that your pension is invested in a sharia-compliant fund ( there usually is an option for this).
If you don’t have enough cash to pay that amount, you may defer the payment until you receive your pension or until a later year. Alternatively you could just set up a direct debit for this year to spread out the payment.
For property and property-based sukuk funds, no zakat is due as the underlying investment is not zakatable.
For SIPPs (Self-Invested Personal Pensions), the zakat you pay will depend on what assets you have invested your SIPP into. If you have invested into an equities fund, use the same approach as above. Simply take 25% of the fund value and pay 2.5% on that.
For investments into stocks and shares, use our guide on how to calculate zakat for an individual stock. In short, you have to determine the proportion of zakatable assets for each company and pay 2.5% on that.
Final salary schemes
These are schemes where you receive a guaranteed pay-out based on your earnings upon retirement. For such schemes, you do not have to pay zakat until you actually receive the money. The reason is that they are viewed in law (and Islamic law) as a deferred portion of your salary. You only need to pay zakat on your salary once you get it – same rules apply.
What zakatable assets are in pensions?
For pensions invested in equity funds, the zakatable assets will be the sum of the zakatable assets of each stock the company owns. As this is extremely impractical to calculate for funds, you can take 25% of the value of your investment in the fund and pay 2.5% zakat on it.
For individual stocks, your zakatable assets are simply the liquid assets that the business holds. You then work out the proportion of liquid assets relative to the total value of the company and pay 2.5% on that.
Any cash held in your SIPP is zakatable in full.
Sara has £20,000 in a workplace pension that is invested in an Islamic equity fund. She also has £5000 in a SIPP that she has invested in individual stocks. The first thing she needs to do is work out the zakatable assets for each of her pensions.
For the workplace pension, she simply takes 25% of the fund value which is £5000.
For the SIPP, she uses our guide on how to calculate zakat for individual stocks. For simplicity, let’s say that her entire SIPP is invested solely in AstraZeneca. Following the process in our stocks guide reveals that the percentage of zakatable assets is 19.3%. Sara takes 19.3% of the £5000 which comes to £965.
The combined zakatable assets for both pensions is £5000 + £965 = £5965. All that remains is to apply 2.5% on this, which gives her a total zakat amount of £149.13.
Where to calculate your zakat
So there we have it. Here is a simple and easy way to calculate your zakat using our comprehensive zakat calculator.