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Are Pensions Lawful?

Answered according to Hanafi Fiqh by Daruliftaa.com

As a standard part of my employment, pension contributions are deducted from my salary each month. Upon retirement, I will receive said pension benefits. Is this lawful? Or does it come under the insurance issue, which is haram?

ANSWER

In the name of Allah, Most Compassionate, Most Merciful,

In order for me to issue a correct ruling, it is important that I first study the rules and principles of the pension scheme. Nevertheless, the ruling provided here is based on the assumption that the scheme operates in the manner where contribution to the pension fund is made by deducting the employee’s salary and contributing it towards the fund, and the employer also makes some contribution towards the fund. Thereafter, the money is invested in a business and upon retirement, the fund pays the benefits to the employee.

From an Islamic point of view, there is nothing wrong with this kind of pension scheme. When one receives the pension benefits, one will merely be receiving back one’s own money. Similarly, the contribution made by the employer or the company is considered to be a gift (hiba). Thus, it is not a form of insurance where premiums are paid and repayment is contingent on some other external event. There is no gambling or interest involved here, as the profit received is a combination of the employer’s contribution (which is a gift) and the profit generated by investment.

However, the only problem here is that the money may be invested in a haram business such as in an alcohol company, building society, etc. It will not be permitted to avail of money that was generated by investing it in an unlawful business. As such, the condition for the permissibility of availing of the total sum in a pension fund is that the money must be invested in a halal business.

You must ensure that your employers invest the money in a halal business. If this is not possible, then you should only take in return the actual amount that was deducted from your salary and that which was contributed by your employer. Anything extra must be avoided if you cannot ensure the money being invested in lawful businesses.

And Allah knows best

[Mufti] Muhammad ibn Adam
Darul Iftaa
Leicester , UK

This answer was collected from Daruliftaa.com, which is headed by Mufti Muhammad ibn Adam Al-Kawthari. He’s based in the United Kingdom.

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