MSO Law Services

1.    The different situations are summarized below.

2.    Where the person is employed in the public or private sector, and membership of a pension or provident fund forms part of the contract of employment, with the monthly contributions being deducted from his or her salary at source: Zakah is only payable,  in the year of receipt or maturity, when the employee receives possession or control of the proceeds of the lump sum benefit. In such event, the net amount so received, after payment of prescribed taxes, will be added to the aggregate value of the Zakaatable assets( gold and silver + cash + trading stock + sound debts)and Zakah must be payable on the remaining unexpended amount thereof, on the relevant forthcoming Zakah valuation date, at the end of the year of receipt or maturity. No Zakah is payable for preceding years. و انما تجب الزكاة فيما يبقى عند نهاية الحول بضمه الى الموجودات الزكوية الاخرى و تزكيته

3.    In this situation of employment, the contribution to the pension or provident fund, so deducted from salary at source, is from a Shariah perspective not deemed to be owned by the employee, but is in fact owned by the fund as a separate legal person. At best, the employee has, absenting possession, control and receipt, only a valid claim for the contribution against his or her employer.   لا يقال انه ملكه الموءجر قبل قبضها فله المطالبة بها : )   البحرالراءق

4.    In the case of a self - employed person, running his or her own business, different considerations apply. In this case, if the person voluntarily subscribes to a retirement annuity fund, Zakah is payable each year on the Fund value which must be added to the aggregate value of the Zakaatable assets as at the relevant Zakah valuation date. يوم وجوب الزكاة The reason is that this voluntary arrangement is analogous to a low risk fixed deposit, or, debenture for a predetermined period. The fact that the funds are not accessible until the member reaches the age of 55, or otherwise as prescribed by the rules of the Fund, has no Shari consequence for Zakah purposes, in this context. هذا بمنزلة السندات او ودائع لاجل

5.    If the net lump sum proceeds of a pension or provident fund, due to a member upon retirement or resignation or retrenchment, are received or controlled by the beneficiary, and are thereafter voluntarily invested, ( eg: in a preservation fund), so as  to inter alia provide a living annuity, then,   in such event, the member must pay Zakah each year on the capital value of the investment. In addition, any unexpended cash balance remaining on his or her periodic income drawdown, will be added to his or her  aggregate Zakaatable assets on his Zakah valuation date, at the end of the relevant Zakah year. و يزكى ما يبقى بضمه إلى الموجودات الزكوية الاخرى
يوم وجوب الزكاة عند نهاية الحول
Example:
Zaid enters into a contract of employment with a company. A term of the employment contract is that the employee must become a member of the provident or pension fund, ( “ Fund”), designated by his employer, and that his monthly contributions to the Fund will be deducted at source from his salary. Upon retirement or termination of employment, Zaid receives or is entitled to access a lump sum benefit of R 3 million ( after tax) from the Fund. The lump sum benefit of R 3 million is subject to  Zakah in the year of receipt or maturity, although a portion may be used to purchase a life annuity. No Zakah is payable for preceding years.

If Zaid chooses to transfer the lump sum of R3 million ( or a portion thereof) to a preservation or pension generating fund, then Zaid must pay Zakah on the passing of each lunar year thereafter, on the value of his investment in the preservation or pension generating Fund, on his relevant Zakah valuation date.
On the other hand, Muhammad, a medical practitioner in private practice, chooses to subscribe, and make voluntary monthly contributions,  to a retirement annuity fund. In this case, Muhammad must pay Zakah on the passing of each lunar year on the value of his investment in the retirement annuity fund,  together with his other Zakaatable assets, on his Zakah valuation date.

And Allah Knows Best
M S Omar
8 May 2021
Updated: 23 March 2024