Personal Finance

Is my workplace pension halal?

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:

  1. Opt out and then do nothing (i.e. just enjoy the extra money in the salary);
  2. Conduct your own investment activity with the money you would have contributed to your workplace pension;
  3. 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!

14 Comments

Keep Reading

14 Comments. Leave new

  • I have been a pension investment manager for many years, so when I saw your topic it attracted my attention. Pension funds use fixed income investments routinely to diversify the risk of stocks and other investments, and funds who wish to minimize risk through ALM (asset-liability management) will use a very high proportion of fixed income investments.

    I presume when you refer to sharia compliance you mean the screens typically applied to minimize exposure to conventional interest (riba) bearing securities and loans, and to prohibited products such as pork and alcohol. The former is quantitatively the most important. Modernist scholars such as Fazlur Rahman and Abdullah Saeed assert (quite reasonably in my view) that interest in modern competitive regulated financial markets is not the same as the prohibited riba from the time of the prophet. Consequently whether pension investments are halal depends on whether you are a modernist or a literalist like Taqi Usmani.

    I think Muslims place too much emphasis on sharia compliance in finance, as opined by scholars who do not disclose their rationales (or their compensation!) it would be better to go to your pension committee and work towards developing ethical investment standards, if there are ethical issues that concern you and other members. After all ethical behaviour was the fundamental message of the prophet, not the parsing of obscure arabic grammatical structures in the classical texts, which seems to consume much scholarly debate.

    Reply
    • Akram Abdel-Rahman
      December 27, 2017 3:19 am

      Good to see both sides of the argument here (the article and this comment).
      An opinion that I respect is not equating interest to riba off the bat, rather compare the interest to inflation first; if interest is roughly equal to the inflation rate, then this may not be considered as riba (however, the conditions and terminology may not be completely inline).
      To build on top of that, my question would be: Consider that one of the investment options your employer provides for your group pension program is a cash market investment that would yield a margin of <2% per year . What are your thoughts regarding opting into a pension program and keeping investments in such a fund (low interest rate)?

      Reply
    • I appreciate your input and your thoughts on the issue. However, I would have to respectfully disagree against the modernist approach to riba. Their approach to riba is not scripturally accurate in my view, and neither does it account for the deep systemic inequities that exist due to the riba-framework on which our economy is based.

      I do however wholeheartedly agree that focusing on interest solely is not Islamic – ethical investment is a much broader area than that!

      Reply
      • Robert Hannah
        May 17, 2018 3:25 am

        I appreciate your point of view. Yes, there are systemic inequities in the modern economy, and I have read many times from Islamic finance advocates that this (I assume you refer to growing income inequality) is due to the interest-based economy. However when you look at the great fortunes amassed in the past (Rockefellers, Getty, Waltons etc.) and currently (Gates, Bezos, Zukerberg) – their wealth arose through entrepreneurship, not by leaving money to earn interest in a bank. No one ever became wealthy that way!
        A better analysis of growing income inequality (but one I don’t subscribe to fully) is Thomas Piketty’s idea that: because the return on capital tends to exceed the growth rate of the economy, the wealth of capital owners tends to increase faster than the wealth of others.

        Reply
        • Ibrahim Khan
          June 1, 2018 2:54 pm

          Thanks for the above comments. I am agnostic as to why there is income inequality. Islamic finance pracititioners have made the link between inequality and interest – I think there is certainly truth to that, but I am not wedded to that idea.

          One must also remember that most businesses/HNWs heavily use leverage in their businesses which enables them to grow much faster and earn much larger amounts than they would otherwise have been able to. So even entrepreneurship, where it is supported by leverage can lead to income inequality on the basis of interest-based lending.

          Reply
          • I am not agnostic about income inequality – I think globalization and technology have much to do with it. Demand for labour is becoming more and more skills based, and reliant on a technical education. The days when a reliable unskilled factory worker could expect a steady lifetime job and a comfortable pension are gone, at least in America. Automation and outsourcing abroad are proceeding apace. It benefits the Amazons and the Apples, and kills those like GM and Kmart who cant keep up. Such is competition and innovation.
            As for leverage, my understanding of it is that startups and riskier companies such as smaller resource companies should be financed by equity, while larger more stable companies with steadier income such as utilities and real estate companies can, should, and do use debt to supplement their capital structure. Its misleading to say that most businesses heavily use leverage. There is quite a literature on optimal capital structure. One of the positive features of Islamic finance is that it does discourage companies from using excessive leverage. Having said that, if debt used prudently such as trade finance can help a company grow, that is a good thing.

  • The 4th option, and best one in my opinion IF f you’re employer is part of a Salary Sacrifice Scheme, is to put into your company pension scheme then transfer the monies out to your own SIPP.

    If your company is not part of a salary sacrifice scheme then Option 3 is simpler.

    Note that if you are a 40% taxpayer then you need to make sure you get the 40% tax relief whichever option you pick.

    Reply
  • Mohammed Khan
    March 25, 2018 9:26 pm

    Some great options put forth – very much appreciated. This topic need to be discussed at length and I think this article is a good start.
    My personal stance is a very reserved one. Originally from a finance background, I have now however come to a point in my life where I’m starting to despise the current monetary/finance system. From the comments above, I guess I am a literist whereby the very word of interest scares me regardless of how different it may be what our creator and prophet pbuh warned us against. So as others may want to find companies undertaking sharia compliant activities to invest in, I myself cannot even get passed th fact that the majority if not all of these public companies have some sort of debt gearing on their balance sheet. To me, investing in a company that looks sharia compliant yet has taken on debt in the name of business growth or even survival, means that I proportionally ‘own’ a portion of that debt. Am I wrong? I have chosen to invest in this company whilst no one has forced me to, and I’m purely doing it to increase my wealth.
    For this reason, I just feel that it’s better to be safe than sorry (from an Islamic perspective) and enjoy your pound today, after all. A pound today is worth more than a pound tomorrow.

    Reply
    • Assalamoalaikum brother, very heartening to come across someone who shares my views. As a doctor, I have faced similar reticence when it comes to the pension opt out options. The basic knowledge I have about the Quranic revelations about Riba, I too, subscribe to the premise that I should stay as far away from the shadow of riba as possible. May Allah guide us and make it easy for us to follow the right path!

      Reply
  • Could you link me to the page on annuities and why they’re haram.

    Thanks

    Reply
  • Abdullah Khan
    August 13, 2018 7:17 pm

    Salam all, I am a CPA who does audits of several public, private and non-public (governmental) entities in the U.S. I can tell you for a fact, especially after auditing many pension fund plans, that there is no way a pension fund (a defined benefit plan) could not be invested in a interest bearing amounts.

    Every pension fund has a target allocation which requires lets say e.g. 50% to be invested in equities (no riba since these are shares of stock in publicly traded company), 20% in mutual funds (riba maybe involved since mutual funds could be invested in interest bearing securities), 20% in fixed income/bonds (riba is involved since the growth of these funds is strictly interest), and 10% in money market cash (riba is involved since the growth of these funds is strictly interest).

    I am not a mufti, but I strongly believe that pensions will always have a riba component, although I cannot comment on whether this is halal or haram — common sense suggests that it’s haram as per countless mention of riba being haram in the Quran.

    Reply
    • Agreed. Unless you have some control over where your pension money is invested like you do in some private pension plans. I have this personally and have chosen an Islamic index tracking fund.

      Reply
  • Quick question: can defined benefit pensions be halal? They’re essentially promising a fixed return for money for life upon retirement. This fact doesn’t change regardless of whether the pension plan is funded by sharia-compliant or non compliant investments.

    Reply
    • we will very shortly be releasing an article on this inshAllah – so please subscribe to be alerted when it is released.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed

This site uses Akismet to reduce spam. Learn how your comment data is processed.

2017: Reflections, The Journey Forwards, and Your Help
Why is interest haram? [Part Two]
Every British Muslim needs a will. IFG Wills is an affordable quality option entirely online.

Follow IFG

YouTube
Get exclusive tips, resources and courses delivered straight to your inbox from IFG.
  • This field is for validation purposes and should be left unchanged.
Menu