If, by now, you have not heard of the term ‘workplace pension’, I would have to ask just how comfortable that rock you’ve been living under is.
I would make a reasonable assumption that, by this point in time, all of our readership has at least heard of a workplace pension, and that all of our employed readership is actively enrolled into a workplace pension (unless they’ve opted out).
The concept of a workplace pension is nothing new. But what is new is the fact that there are now minimum contributions, which you can see outlined here. This is all very much part of a governmental drive to get people to start saving privately for their retirement, as the national burden is too heavy. Leaving the politics to one side, I want to discuss something which will be relevant to our readers: is my workplace pension halal?
Why is this an issue?
To begin with, let us understand why we are even discussing this.
The way pensions work is essentially like any investment fund. The pension fund takes in the money from the contributions and puts it toward investment activity. It is hoped that the investment will see a positive return, so that your contributions grow over time and you end up with a bigger pot of money that the actual amount you put in initially. This pot of money then forms the basis of your drawdown on that pension (we will not discuss the mechanics of the options you have when drawing down on your pension in this article).
The reason it is important to start with this understanding is that, as with any investing activity, we must ensure that it is halal.
How do I find out?
I find pension schemes to lack transparency when it comes to finding out what sorts of activities they choose to invest in. In any event, even if we did know, ascertaining whether the pension fund is halal or not would be an arduous task. It would involve checking every single component part of what it invests in, analysing the sharia compliance of each one, then working out what percentage of the fund each component part comprises to then work out overall sharia compliance.
This is not practical.
The most obvious and the most concrete manner in which to ensure your workplace pension is halal is to see whether the pension provider actually offers a certified sharia-compliant offering. I am aware that some do, and it is just a case of opting for it. If this is the case for you, workplace pensions are a great tool because you effectively get free money by virtue of your employer contribution, and your element of the pension contribution is done gross of tax, so you essentially get a 20% boost.
What if my workplace pension is not halal?
Unless you have a certified sharia-compliant option within the pension provider’s offering, my personal view is that there is too much uncertainty to be able to continue having a workplace pension (you might not share this view). After all, if the method of the pension fund’s investing is not halal, do we really want to a) be wasting our salary money into a haram fund, and/or b) be funding our retired life through tainted means?
If the workplace pension is not halal and you no longer wish to continue with it, there will be an option to opt-out.
Of course, this is not ideal, as it means you no longer have a steady savings route for your retirement and, perhaps more importantly, you lose the all-important employer contribution.
What are the alternatives if my workplace pension is not halal?
I see our options in this instance as broadly three-fold:
- Opt out and then do nothing (i.e. just enjoy the extra money in the salary);
- Conduct your own investment activity with the money you would have contributed to your workplace pension;
- Set up a self-invested personal pension (a “SIPP”).
Option 1 is probably not a wise move if you have a longer-term view in mind. However, if you do have some short-term goals (things like saving for a house, car, etc), the boost you get to your take-home salary from cutting your pension contribution will help you to achieve that short-term goal quicker. However, if you do not trust yourself to have a plan to resume pension contributions once you have achieved that goal, it might be wiser not to go down this route as you might get used to the extra cash landing in your bank every month!
Option 2 would work as follows: you get your monthly salary, and you manually siphon off your chosen amount every month. The unfortunate thing here is that you will have been taxed, so you effectively have to pay 20% more than you would have done if this were a gross pension contribution. However, what this method allows you to do is set up an ISA for yourself (either a halal cash ISA or a stocks & shares ISA) and funnel away your chosen amount into this account every month. You can then either keep accumulating (if you open a cash ISA) or choose to invest into sharia-compliant companies of your choice or a sharia-compliant fund (if you open a stocks & shares ISA).
The great thing about option 2 is that even though you will get taxed, withdrawals from an ISA are free of tax or limits. Whereas pensions come with strict rules (and fees may be applicable) when it comes to withdrawal, ISAs are very straightforward – there is no tax on withdrawal and you can take out all the money (subject to the rules of your ISA provider). This means that you don’t have to wait until state pension age to start withdrawing – your ISA is yours and you can do what you like with it.
ISAs are not a designated retirement vehicle in the same way a pension is, but they are extremely flexible and there is no reason why you cannot use an ISA to actually save for retirement.
Option 3 – a SIPP works in a very similar way to an ISA from a practical perspective (i.e. it’s your account, you can manage it, etc), but comes with the formal rules of a pension – namely, you cannot withdraw until state pension age and the usual pension rules on drawing down apply.
On the plus side, you do get the 20% relief that you get with workplace pension contributions. The way it works from a practical perspective is that the money you contribute into the SIPP is not deducted from your gross pay. You will instead have to pay it yourself from your net pay, but then 20% of that amount is credited, and that constitutes your tax relief from the Government.
So what you could do is open a SIPP, and invest in halal companies or funds with your money and take complete ownership of your pension monies and investment activity.
As for employer contributions to a SIPP, they are not obligatory but employers can choose to contribute to your SIPP.
One last thought
You will see that a SIPP is very similar to a standard workplace pension, except it’s you that is controlling the investment activity. This makes me wonder why employers are not obliged to contribute to a SIPP if that is what you are choosing to operate instead of a normal workplace pension.
If you are lucky enough to get your employer to agree to do it, then great. However, there is no obligation on them.
I am of the view that the individual should have the choice of what their pension looks like, and that employer contributions should not be predicated on an employee having a pension with a certain company.
For me, the ideal scenario for an employee concerned with sharia-compliance and not having that option in the workplace pension, would be the ability to open a SIPP and have employer contributions.
Update: we’ve also now got a detailed article on defined benefit pension schemes so make sure you check it out: click here.
Your thoughts are welcome as ever!