Q: What is the ruling on the following Pension:
I am part of a defined contribution pension scheme which I have paid into for many years. I am coming up to retirement very soon. With regards to Zakaah, What and when would zakaah be payable on the funds? Would I have to pay Zakaah for every year I have been apart of the scheme.
A: الجواب حامدا ومصليا ومسلما ومنه الصدق والصواب
Defined contribution pension schemes are effectively long term investments and will have some element of zakat liability at each zakat anniversary of the pension holder. If it is assumed that the investment avenues are sharia compliant, then the pension holder would be required to calculate the zakatable assets [cash, receivables, raw materials, finished goods, stocks for sale] within the fund each year and pay zakat each year at 2.5%. The nature of the investments will determine exactly how much zakat is payable. If it is difficult to calculate the exact amount then a safe rule of thumb would be to consider 40% of the value of the fund to be zakatable and pay 2.5% on that as zakat.
This needs to be done each year. If one has delayed until retirement, as you have done so, then one needs to calculate the historical value each year of the zakatable assets for all the years that zakat was not paid and pay zakat on that now at 2.5%.
If the investment avenues are not sharia compliant then the details of the fund need to be ascertained in order to be able to offer an opinion.
And Allah knows best.
Mufti Mohammed Zubair Butt
Chair, Al-Qalam Sharia Scholars Panel