Zakat Calculations for Pension Funds

By Mufti Muhammad Kadwa
Posted: 27 Safar 1424, 17 April 2004

Checked & approved by: MUFTI EBRAHIM DESAI

Q.) I am a resident of the UK and as such I will be entitled to a state pension if I live that long. The state also claims sums from my income (paid as part of National Insurance) for an additional pension (which used to be known as SERPS or State Earnings Related Pension). I also have two additional pensions.

1. Is Zakat payable on pensions (money which is not in your possession)?

2. Is there a difference between State Pensions (where the 'investor' has no choice but to pay into the pension scheme) and Personal/Occupational Pension where the investor has chosen to put his money into a pension for tax saving / investment reasons (although this money will remain inaccessible before a certain age)?

3. On which pension amount is Zakat due (if it is due on these pensions)?

4. I have had an occupational pension for the last 5 years (my working life after University) and I have neglected to pay Zakat on the amount (through forgetfulness and ignorance) until now. How should I work out the Zakat amounts due for each year and from what date would the first Zakat payment be calculated? (I have rarely had enough savings (or other investments) to get into the Zakat threshold and I have not had a full year with enough savings either, so my pension investments are the only consistent savings I can use for the calculation). [Ahmed Ali Patel]

A.) 1. Zakat is applicable on all voluntary contributions you have made towards the pension scheme. However, since the money is not in your possession, Zakat will not be levied at this moment but only once you get physical possession of it. Once you get possession, Zakat will have to be paid for all the previous years as well. For purposes of easier calculation, it is better to pay the Zakat annually on the complete sum of your pension contributions. Zakat is not levied on compulsory deductions nor on the amount contributed by your employer. Zakat on these will only come into effect when you get access to these funds.

2. Determine by discretion when you reached the Zakat threshold, i.e. the exact Islamic date when you had this Zakatable amount. Determine how much you had on the same day the next year. Zakat will be levied at 2.5% on this amount. The same will apply for the second year, third year and so forth.

3. Once you have a minimum Zakatable amount in your possession, your Zakat year starts on that date. On the same date (Islamic date) the next year, if you still have this minimum amount or more, Zakat is payable even if the amount went below the Zakat threshold during the course of the year. You should have used the above method instead of calculating it with Ramadan.

4. Determine what the Zakaat Nisaab was around that time and calculate the exact date on which you became an owner of this minimum amount. And calculate from this date. And Allah Ta'ala Knows Best