Retirement Planning with Shariah Compliant Pensions
What Is a Shariah Compliant (Halal) Pension?
We are often asked, “are pensions halal”, the simple answer is they can be. It all depends on how the funds are invested.
A pension is simply a tax efficient investment wrapper which can hold both conventional investments or Shariah pension funds. A Shariah compliant pension, sometimes referred to as halal pensions, allow individuals to save for retirement while adhering to Islamic principles. While pensions are primarily designed for retirement funding, they can also be utilized for other purposes, such as ad-hoc expenses (e.g., holidays) after reaching the normal minimum pension age, which is currently 57 and will increase to 58 in April 2028.
Pensions serve as a tax-efficient savings vehicle that receives full tax relief on contributions. Most people fund their pensions through workplace plans, where contributions are typically deducted before income tax and national insurance (salary sacrifice) although alternative arrangements are available to employers.
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The vast majority of workplace pensions are “defined contribution” scheme, which are investment linked. Therefore, the amount you receive in retirement is dependent on your level of contribution, investment growth, investment term, charges and risk.
The default employer pension plan in the majority of circumstances are not Shariah compliant pensions as they are designed to cater to the average individual and therefore would not meet the needs of an investor looking for a halal pension. There may be options available to “switch” to a Shariah compliant fund although there are usually a very limited number of options available through most workplace pension schemes.
Beyond shariah compliance in a pension, workplace pensions may differ in other ways relative to your goals, such as level of risk, asset allocation, charges and investment management style.
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Another type of pension scheme is a “defined benefit” scheme, whereby the policy holder will receive a defined income at their normal pension age. The amount they will receive is based on predetermined factors i.e. an accrual rate. Some of these schemes are funded (via investments), most commonly found in the private sector, others are unfunded, such as the NHS pension scheme. In either variant, the pension member is not responsible for the underlying management or performance of these schemes.
Most Islamic scholars are of the opinion defined benefit plans are halal pension plans and view the pension income as deferred income payments.
Pensions Come in two variants:
Pensions are a highly tax efficient method of funding retirement expenses, although they are not the only method. Alternatives such as rental properties and investments can also be used to fund retirement, however this can cause it’s own issue with regards to potential Inheritance Tax. It’s therefore important to get appropriate retirement planning advice.
To find out more about Shariah compliant investing, click the link below:
FINANCIAL JOURNEY
The Three Phases of Life
0 - 25
Early years & personal development
This phase is centred around building the foundation for your future. Time is spent developing skills, pursuing education, and starting your career. Financial planning may not be a priority during this stage, but the habits and knowledge acquired here play a crucial role in shaping your financial future.
25 - 60
Working life - Accumulation
The majority of wealth is generated during this phase. These 35 or so working years are pivotal for financial growth and stability. It’s during this time that strategic retirement planning becomes essential to ensure you’re well-prepared for the future. The savings and investments made now will directly influence your quality of life in retirement.
60 - 90
Retirement - Decumulation
Retirement typically begins between ages 60 and 70, a period when physical capability to work often declines. With an average of 30 years ahead, it’s vital that sufficient provisions have been made during the accumulation phase to support a comfortable and stress-free retirement. Planning ahead ensures your hard work translates into security and peace of mind.
How To Make Existing Pensions Shariah Compliant
Given that most default workplace pension plans invest in non-halal funds, here are some steps to make your pension Shariah compliant:
Consider “Switching” Your Pension Fund
Contact your existing provider to explore Shariah pension fund alternatives and ensure they meet your investment needs.
Consolidate or Transfer Existing Pension Pots
Combine your existing pensions into a single Shariah compliant pension portfolio. You can do this yourself through an investment platform or with the help of Blackstone Wealth.
Funding More into a Shariah compliant Pension
Once we establish your required pension fund for retirement, we can discuss options for additional contributions to your halal pension scheme.
Can I Fund More Into a halal Pension?
Absolutely! Once we’ve established your required pension fund in retirement, we can discuss additional pension funding into your Shariah compliant pension scheme.
We advise on Self Invested Personal Pension (SIPP), which provide a significantly wider range of investment opportunities than employer based scheme.
The maximum you can pay into a halal pension scheme is based upon your UK relevant earnings (your earned income), subject to a maximum of £60,000 per year. It is also possible to carry forward unused allowances from the 3 previous years.
For individuals who are not working (including children under 18 - Junior pension), it is possible to fund £3,600 per year into a halal pension.
Pension contributions into a Shariah compliant SIPP attract basic rate tax relief which is rebated by HMRC. If you invested £2,880, this will be grossed up to £3,600 by HMRC (an additional £720). Higher and additional rate tax payers can claim back the additional 20%-25% via their self assessment tax returns.
I Already Have a Workplace Pension, Is That Enough?
It all comes down to what retirement looks like for you. Consider the below:
What age would you like to retire? the earlier you retire, the larger the pension fund required
What level of income would you like in retirement?
When and how will your mortgage be cleared?
Will you still have expenses related to your children? wedding costs, house deposit?
How many years have you funded of your state pension?
What level of pension benefits have you accrued and what will they pay in retirement?
As part of the advice process, we collate your existing pension plan information, to build a picture of your overall halal pension portfolio. Once the research is completed, we can discuss consolidation of your existing pensions into a single Shariah compliant pension plan, which will help manage and administer the plan on an ongoing basis.
We’ll help you to understand when you can afford to retire and what level of income you can expect to receive. We will also advise on the most tax efficient way of facilitating your retirement income, whether this is from a pension alone or a combination of shariah compliant pensions and investments.
Our expert advice simplifies your Shariah-compliant pension planning. We help you understand when you can retire, expected income levels, and the most tax-efficient ways to achieve your retirement goals.
Retirement & Lifestyle Planner
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What Happens When I Reach Retirement?
As you approach retirement, we will continue to monitor your Shariah-compliant investment portfolio. When the time comes, we can advise on the most appropriate way to withdraw your Shariah compliant pension benefits. We can also provide cash flow modelling to visualize what your future withdrawals might look like.
It's important to note that annuities are not considered permissible in Islam due to the contracts containing gharar (excessive risk or uncertainty), which creates unpredictability about how much income you will receive throughout your lifetime.
Shariah compliant Drawdown Options
As part of the Shariah compliant drawdown options, we can advise on:
Withdrawing your Tax-Free Lump Sum (TFC)
Flexi Access Drawdown (FAD)
Uncrystallised Funds Pension Lump Sum (UFPLS)
We will help you select the most suitable method for accessing your funds, taking into account your overall financial circumstances.
Investment Advice Process
Click below to find out more about our Investment Advice process
Shariah Compliant (Halal) Solutions
Property Finance
Finance for your main residence and your investment property
ISA & LISA
Tax efficient savings with no income tax or capital gains tax on withdrawals
Other Investments
Alternative tax wrappers used to produce a diversified investment portfolio
Why Blackstone Wealth?
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