A pension fund is a pool of money that is managed by professional fund managers. The aim of the fund is to save money and invest money in preparation for retirement. A Sharia pension fund is a saving scheme for retirement that aligns with the rules of Islam. Sharia pension funds do not attach themselves to any form of interest or any haram industries.
Sharia pension funds are ethical investments, with funds invested in industries that offer social benefits such as healthcare, agriculture, and education.
With the rise of Islamic finance on a global level and the increased demand for Sharia-compliant financial services, the growth of Sharia pension funds has expanded significantly.
Sharia pension funds will typically have a screening process ensuring they comply with Islamic finance rules. It is important for these types of pension funds to have ongoing compliance monitoring, which means that a qualified Sharia scholar or expert reviews compliance regularly.
In 2024 Sharia pension funds saw significant growth. The Nest Sharia Fund increased its assets by a third to over £180 million.
Historically, Muslims have found it difficult to fund Sharia-compliant funds. The Office for National Statistics found in 2021 that 33% of Muslim employees did not have a workplace pension due to concerns about Sharia-compliance.
These statistics make it clear that there is a huge market for pension funds that comply with Islamic finance principles. Recently, the Financial Times has reported that Sharia pension funds are seeing a huge swell 'amid returns boost'.
WHAT MAKES A PENSION FUND SHARIA-COMPLIANT?
The key features of a Sharia-compliant pension fund are:
- Strictly no interest: the pension fund should have no involvement with interest in any way. This means that any interest-yielding activities, industries or products are not permissible.
- Ethical investing: the pension fund should be mindful of the industries the investments are involved in. Industries and sectors considered haram such as gambling and alcohol should be avoided.
- Compliance: compliance and ongoing monitoring are essential for a Sharia complaint pension fund.
- Sharia screening: financial and ethical screening must take place to ensure that organisations invested in have low levels of overall debt.
- Models of operation: profit-sharing and risk-sharing are the encouraged models of partnership working.
- sukuk/Islamic bonds
- investing in property without interest-based loans
- investing in ethical and sustainable industries such as healthcare
COMPARING TOP SHARIA PENSION PLANS
If you are looking for Sharia-compliant pension funds to ensure you can save for retirement without breaching Islamic rules, then Penfold and Nest pension funds are a good place to start.
NEST SHARIA PENSION FUND
The Nest Sharia Fund invests in what are known as Islamic bonds (sukuks) that are fully Sharia-compliant. Nest ensures that Islamic scholars screen the investment products and services to ensure they adhere to Islamic rules.
In addition, Nest's Sharia Fund avoids haram industries and interest-bearing investments.
Nest's fee structure consists of a contribution charge (around 1.8%) and an annual management charge in the region of 0.3% based on the value of the fund.
With ethical investments at the core of its activities, the Nest Sharia Fund delivers growth whilst generating income. More recently, Nest has worked on diversifying its investment portfolio to include a 30% allocation to the sukuks it invests it.
PENFOLD SHARIA PENSION FUND
The Penfold Sharia Fund invests in a diverse portfolio of companies and funds that all operate in accordance with Sharia principles.
The Penfold fee structure charges an annual fee for savings up to £100k of 0.88%, and this fee drops to 0.53% on amounts over £100k. This transparent and easy to follow fee structure makes this pension fund attractive to investors.
Both these Sharia pension funds use rigorous screening processes that aim to ensure that all investments comply with Islamic finance rules.
If any company they invest in has a proportion of what is considered to be non-compliant income (ie income from interest), then they use purification processes such as donating money to charity.
INVESTMENT RISKS AND REWARDS
Sharia pension funds are the same as all investment vehicles on the market. They come with their own unique set of risks and rewards. For Sharia pension funds, the risk management and mitigation strategies should be aligned with Islamic rules.
Sharia pension funds tend to avoid fixed income securities and conventional bonds as these vehicles rely on interest. Instead, Sharia pension funds prefer to invest in Islamic bonds.
RISK
The risk profile for Sharia pension funds can sometimes have a higher risk exposure due to the fact that they stay away from conventional interest-bearing bonds.
RETURN
In the long term, Sharia-compliant funds deliver comparable and competitive returns to conventional bonds.
ETHICAL INVESTMENTS VS CONVENTIONAL FUNDS
It is important to note that Sharia pension funds maintain a balance between competitive financial returns and ethical investment strategies. This makes Sharia funds an attractive option for investors.
If you are looking for investments that focus on societal benefit whilst generating an income (or savings pot) then Sharia pension funds are a great alternative to conventional bonds.
Ethical sectors have seen a massive resurgence in recent years, with strong growth potential. Industries such as renewable energy and technology are prime for investment.
Investors are increasingly considering environmental, social and governance (ESG) factors when examining pension funds.
- Over 89% of investors consider ESG when investing.
- In the UK over 57% of investors now hold ESG investments
- Young Gen Z investors are increasingly interested in ethical investments
- Islamic funds continue to deliver results with nominal growth rates of 84% and 13% of annualised growth rates (Morningstar.CA)
HOW TO CHOOSE AND SWITCH TO A SHARIA PENSION FUND
In order for you to choose a Sharia pension fund you need to ensure you understand what a Sharia pension fund is and how it operates.
If you have a pension fund that you want to switch to a Sharia fund then you need to:
- Review your current pension fund.
- Find out if your pension fund provider is able to offer a Sharia-compliant fund.
- If not, ask if you can switch your pension fund.
- Check your pension fund information to see if there are any penalties or fees for switching to a Sharia-compliant provider.
- Research what Sharia pension fund providers are available and make sure they are fully Sharia compliant.
- Choose your new pension fund provider and open an account.
- Ask your current pension provider to transfer your fund to the new Sharia-compliant provider.
Switching to a Sharia pension fund should be straightforward.
FUTURE OF SHARIA PENSION FUNDS
Sharia pension funds are becoming a popular investment vehicle and retirement savings plan for Muslims and non-Muslims. The ethical investment market continues to grow as investors across the world seek out sustainable and ethical investments.
Underpinned by social responsibility, the investments within Sharia pension funds appeal to a global audience of investors.
Sharia funds have become known in financial circles as promoting financial inclusion. They cater to investors who have not been able to fund ethical investments or investments that align with Islamic rules.
If you want to prepare for retirement in a Sharia-compliant way then Sharia pension funds provide the perfect vehicle for you. Providers like Penfold and Nest provide Sharia-compliant pension funds with competitive fees.