Question on Zakah Implications of Compulsory Pension and Provident Funds
Dear Respected Brother, Shaykh MS Omar
It would be appreciated if you could assess the Zakah implications on my Deferred Pension because I’m receiving contradictory advice. Basically, the structure is as follows:
When I joined Newco in 10/1987 it was a condition of employment to contribute to the Newco Group Pension Fund (NGPF), a non-Shariah compliant retirement fund.
At around 1996 most pension fund members were transferred into a provident fund, still called the NGPF.
During 1997 my work function was made redundant, and I was compulsorily retrenched from Newco in 12/1997. This was solely the company’s decision, and I had no discretion in the matter. Upon being retrenched, I opted for a deferred pension. This meant that my pension benefits remained in the NGPF until it was to be either withdrawn (with a higher tax impact before age 55) or when I became eligible for retirement (with a lesser tax impact at age 55+). The rules of the NGPF state that the normal retirement age is 63, and that early retirement is possible from age 53. To date, I had decided not to withdraw or retire from the NGPF, as I probably will continue working for another 4 years or so until age 63 at my current Employer, insha’Allah. I’m also a member of its non-Shariah compliant pension fund, which was also a condition of employment.
The guidance I received from an Islamic socio-welfare NGO was that because:
I had no choice in being a member of the NGPF; and I had specifically decided not to retire from the NGPF yet, and hence do not have access to the funds, it is not zakatable. The contrary guidance I received from an Investment Manager, is that because it was possible to retire from the NGPF since age 53, it is zakatable.
It would be appreciated if you were able to provide guidance on the above matter, including the principles upon which your valued opinion is based (~ ratio decidendi). Please also indicate if there is consensus amongst scholars of the various Mathaaib on matters such as, or similar to the above set of circumstances.
JzkAllah again for your time. Please let me know if you require any further clarification or additional details.
1. It is apparent that you were employed by Newco from October 1987 to December 1997, when your employment was terminated by way of retrenchment.( “ the Employment Period”)
2. During this employment period, you were obliged to contribute each month , as a deduction at source, to the Group Pension Fund ( NGPF) , as a mandatory term of employment.
3. No Zakah is payable by you, as a member of NGPF, during the approximately 10 year Employment Period, because the monthly at- source deductions from your salary did not enter into your ownership but in fact were transferred to, and deemed to be owned by NGPF as a separate legal person or entity .لعدم الملك التام المملوك رقبة و يدا : راجع رد المحتار: كتاب الزكاة
4. In December 1997 , you became entitled to withdraw the lump sum proceeds of your pension fund benefits , ( “ lump sum amount “) following your termination of employment by way of retrenchment in October 1997.
5. At this point, ( December 1997), upon maturity, you became for the first time, the owner of the lump sum amount, acquired actual or constructive possession and control thereof, and were entitled to dispose or deal with the lump sum withdrawal benefits, as you pleased.
6. It follows that Zakah became payable on the withdrawal benefits constituting the lump sum amount, in the year of actual receipt thereof, ( December 1997) , and not for prior preceding years, during the Employment Period.
7. The fact that you voluntarily elected to transfer the lump sum amount to another retirement arrangement in the form of a Deferred Pension does not affect the Zakah position: you remain liable for Zakah , upon actual or constructive possession, and thereafter upon the passing of each lunar year , calculated as from the year of receipt of the lump sum amount. ( December 1997).
8. It should be mentioned that the lump sum amount in the form of the withdrawal benefit as at the 31 December 1997 is characterized in Shari’ah as compensation for services rendered in the past , and accordingly deemed halaal, irrespective of the source of accrual. The amount representing the growth , over and above the aggregate contributions, does not constitute riba or impermissible income, because it is not a return on the ownership of the employee. Purification is therefore not required in respect of the withdrawal benefit upon maturity.
9. Now we turn to your employment situation after 1997, whereafter you joined a new employer, and currently remain employed: you are currently (post-December 1997) a member of a new separate pension fund ( “ the New Pension Fund”) in terms of a mandatory condition of employment, in terms of which your contributions are deducted at source and transferred by your new employer to the New Pension Fund. ( not connected to the previous voluntary deferred pension arrangement).
10. The same principles apply as set out in paragraph 3 above mutatis mutandis in the sense that your monthly contributions, deducted at source, are owned by the New Pension Fund, with the result that no Zakah is payable until the lump sum proceeds become due and payable to you, as a withdrawal benefit, in the year of actual receipt, upon termination of your current employment ( for whatever reason, including dismissal, resignation, retrenchment or retirement).
11. Once the member elects to transfer the lump sum withdrawal benefit, upon maturity, to another approved Fund ( eg Preservation Fund) , then the withdrawal benefit upon maturity is deemed to be in his or her Shari possession for all purposes, including the payment of Zakah. However, in this instance, the member will be responsible to invest the lump sum proceeds so received in Shari'ah-compliant investments.
12. The aforegoing answer accords with the conclusions of the illustrious Mufti of Pakistan, Mufti Shafei (ra) ( on The Zakaatability Of Provident Fund and Interest) and his distinguished son, Mufti Taqi Usmani, and the relevant resolution 143 ( 9-14 April 2005) of the International Islamic Fiqh Academy (an organ of OIC).
And Allah Knows Best
M S Omar
28 May 2022