Sharia Pension Funds
Introduction
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.
Some examples of Sharia-compliant funds include the following:
- 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.
If you want to transfer a workplace pension then speak to your HR team or your employer to find out if they accept transfers of the fund.
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.
Explore more news
In traditional and western retirement planning there was one main model used for investing and that was the one that created the most profit with any given risk tolerance. However, in recent years, the demand for Sharia compliant retirement planning has grown. This growth alongside the demand for more socially responsible investment means that Islamic finance has created Sharia compliant options for retirement planning.
Socially responsible investing is at the heart of Sharia law. What it means for those looking to build a halal retirement fund is that it limits an investor's portfolio to those kinds of investments that are deemed to be socially responsible.
Retirement Planning
Retirement planning is a key part of planning for the future. It is important for many different reasons including the following:
- Maintaining quality of life
- Facilitating financial independence
- Inflation protection
- Reducing financial stress in later years
- Managing longer life expectancy
- Covering benefits and pension gaps in later years
- Legacy planning
- Facilitating early retirement
Retirement planning ensures that you take a strategic and proactive approach in planning for your future. It is a means of securing your financial future with a roadmap for saving, investment and managing your finances.
WHAT IS SHARIA COMPLIANT RETIREMENT PLANNING?
Sharia compliant retirement planning refers to making financial arrangements for your future that do not contravene Islamic rules relating to financial transactions and savings.
Retirement planning in a Sharia focused manner refers to preparing for retirement whilst adhering to ethical guidelines outlined in Islamic finance.
Let's examine some of the key principles related to Sharia compliant retirement planning:
- Interest - the main rule for halal retirement planning is that you must avoid riba (interest). Islam strictly prohibits any form of interest. If you are planning for your retirement make sure that none of your investments and savings accounts are not linked to interest in any way. In fact, you should ensure that any product, service, or company you deal with does not include interest based products or the payment of interest.
- Risk and profit sharing: Islamic finance rests on the principle that transactions and deals should result in both parties sharing the risk and profit. This creates a more equitable relationship when dealing with money.
- Ethical investment: retirement planning that is halal encourages ethical and socially responsible investing strategies. This means that you should look to invest in industries and companies that lead to social benefit (ie education, healthcare, relieving poverty) and stay away from companies that are involved in haram industries such as gambling, war, and alcohol.
- Charity: although not necessarily related to retirement saving, ensuring you keep up with your zakat and sadaqah payments during your life is important. Not only does this form of charity enhance your adherence to Islam, but it also means that you can set aside money or a portion of your wealth for charitable purposes later on in your life.
- Avoidance of speculation: if you are retirement planning then you need to be choosing products and investment options that are secure. Avoiding speculative products and markets means your long term planning is on more stable ground. Islam seeks to minimise ambiguity and uncertainty in financial dealings. As an investor, you should seek those investments that are asset backed and tangible.
WHAT IS AN INVESTMENT?
An investment is something that you invest in to generate a return. When it comes to halal retirement planning, a halal investment is one that complies with Islamic rules.
There are more products, services and investment options on the market than ever before. Islamic finance is still a dynamic industry, so for anyone looking to plan for their retirement and future you should know that there are many products already on the market.
When it comes to stocks and equities, Muslim investors can construct a portfolio that is Sharia compliant by ensuring that they research the companies, choosing those investments that meet the Islamic finance criteria of being compliant.
Types Of Retirement Accounts
When planning for retirement there are a few different options. You can either use regular investment accounts and earmark part of the savings specifically for long-term investment. Or, you can use retirement accounts that are created for the sole purpose of future planning.
In the UK, there are Islamic pensions that do comply with Sharia principles. They focus on investing in halal industries and assets, using a halal investment plan.
Another form of long-term investment planning includes real estate. For many people, property is a means of planning for your retirement. There are many halal mortgage options in the UK and European markets for Muslims to access. These mortgages are structured to ensure the individual does not have to pay or be charged interest to the bank that provides the mortgage as a lender.
Sharia Compliant Pensions
As an employee in the UK, it is very likely that you are already paying into a workplace pension. In addition to this, you can also have a private pension to supplement your income in retirement.
There are various Islamic pension schemes available, alongside halal Islamic bonds called sukuk and other investments that are Sharia compliant.
Muslims can also look into having a halal SIPP which are self-invested personal plans. These plans are a type of pension that provide individuals with the flexibility to create their own pension portfolio. A halal SIPP is one where the requirement of the pension investments is that they are Sharia compliant.
SHARIA RETIREMENT PLANS - WHY HAVE THEM?
There are many reasons why you should have a Sharia compliant retirement plan, not least so that you adhere to Islamic rules.
As we become an aging population it is more important than ever to ensure we have the means to live and survive as we age.
Sharia retirement plans are necessary because they:
- are a form of voluntary Islamic pension so you can adequately plan for retirement.
- provide opportunity to manage the risk and return for the future
- create a flexible investment plan
- are Sharia compliancy
- lead to secure, halal financial planning
For anyone looking to build a secure halal retirement plan you need to research and make all the relevant enquiries as soon as you can. Look into banks, financial institutions and services that provide pensions and future planning.
Consult with Islamic scholars and financial advisors who are knowledgeable about Islamic finance and give you accurate information.
Remember, the Islamic finance offerings and landscape is ever-changing and growing and the value of its services should not be underestimated. As the economy continues to fluctuate it is important to understand the commercial and business process relating to retirement planning. Understand what it is you need for the future and start making plans now.
Determining Sharia compliancy is a critical part of halal retirement planning. You need to be able to evaluate an investment and eliminate any element of haram so that it aligns with your Islamic belief system.
A timely injection of business finance
The problem: Bradford-based pharmacy business Biomed Care Services was facing high demand for their medicine management solution. Strong growth meant that in order to continue delivering a high quality of service their stock control systems had to be improved.
The company, founded in 2015, had developed a strong presence in the north of England and become a key supplier to the NHS, servicing around 200 care homes and residential homes, along with private hospitals.
The solution: To maintain its growth, the company sought to raise £50,000 of additional working capital through Sharia-compliant finance.
Biomed Care Services had previous positive experience of raising over £36,000 of working capital with Qardus. This provided the confidence that the new working capital target could be achieved in the necessary timeframe.
The outcome: The company now has a two-year unsecured amortising finance facility with Qardus, giving it the capital required to support their next phase.
“It was great working with Qardus for a second time to raise this working capital facility. The additional funding will help support stock control to service the high demand we are currently experiencing. Thank you for making the process from end to end seamless and straightforward, we highly appreciate it.”Shahid Khan, Director, Biomed Care Services
“Qardus is the first ethical and Sharia-compliant crowdfunding platform that offers businesses such as Biomed Care Services an opportunity to access fast and affordable financing that adhere to Islamic finance principles and has been certified by Sharia advisors. We are very happy that we were able to meet our target within a few weeks.”Hassan Daher, CEO & Founder, Qardus Limited
Please remember that when investing in the offers available on the Qardus platform your capital is at risk and returns are not guaranteed. Past performance is not indicative of future results.
In recent decades Islamic finance principles have become more mainstream. Two key components in Islamic finance are Islamic banking and Islamic insurance which is also known as takaful.
Takaful is a form of Islamic insurance, but it is different from conventional and western insurance policies. Geared towards a Muslim customer base, takaful involves a pooling system whereby members each pay money into a pool fund and effectively guarantee each other against losses and damages.
Essentially, takaful is a system within Islam of mutual insurance. It is based on the following principles
- mutual assistance
- solidarity
- co-operation
In addition, the takaful system is designed to be fully Sharia compliant and in line with Islamic principles relating to financial transactions.
That means takaful does not include any form of interest (riba), or unjust enrichment (gharar). Members who pool their funds are protected by each other by pooling their respective contributions. These contributions are then used to provide financial cover for those within the group who face a claim or a loss. The system of collection and distribution is an ethical and Sharia compliant experience for the participants.
This article will examine how takaful works, and the main Islamic principles relating to this form of insurance.
Principles Of Takaful
As mentioned above the three main principles relating to takaful are mutual assistance, solidarity, and co-operation that offer protection from losses.
These principles mirror the core Islamic finance principles that centre on ethical funding and social responsibility.
- Mutual assistance: this principle is based on reciprocal help. Participants or members of the takaful fund help each other out, and in doing so they share the risks and rewards of the scheme.
- Solidarity: the takaful system is based on principles relating to social solidarity. This reflects the ethical stance within Islamic finance which focuses on the benefit to society rather than the individual. The social solidarity aspect of takaful fosters and enhances the sense of community among the participants. What this means in reality for customers is that their financial needs are met, whilst they are also helping others.
- Co-operation: As it is based on the principle of mutual support, it is clear that co-operation is key for takaful schemes to succeed. Each member must agree to co-operate with the others for the greater good of the scheme.
How Does Takaful Work
Takaful involves the following components:
- Pooling of contributions - participants all contribute to the fund which is managed by a takaful manager
- Providing insurance coverage - the fund offers participants insurance coverage for specified risks
- Processing claims - the takaful operator manages the claims
- Costs - the cost of administering the takaful system is covered by the contributions made
- Profit sharing - as there are no middlemen (as is the case in traditional insurance products), the profits are shared. This means that if a claim is made the takaful operator uses the funds already in the pool to settle the claim
TAKAFUL - IS IT REGULATED?
In many countries across the globe, there is regulation of takaful schemes. Especially in countries that have adopted Sharia law. In Muslim countries takaful sometimes forms part of government services and policies.
How takaful is regulated depends on the country and region you operate within. Typically, a takaful scheme will be governed by the insurance rules and regulations of that region.
The type of protection on offer includes insurance industry regulations, business regulations, tax laws, and consumer protection laws. You should always check the status of any takaful scheme before joining it.
Benefits Of Takaful Insurance
There are many different advantages of taking part in takaful insurance. The main benefit to Muslims is that they can benefit from an insurance scheme that is Sharia compliant.
Some of the other key benefits of takaful include the following:
- Flexibility: takaful insurance can be tailored to meet the specific needs of an individual or business.
- Ethical Investment: As takaful operates in compliance with Islam and Sharia rules, it means that is it an ethical and attractive option for those who want to invest in a socially responsible way.
- Mitigated Risk: Pooling contributions via takaful insurance reduced risk for all involved and also generates revenue to deal with insurance claims. Overall, takaful offers an ethical strategy when wanting to secure an insurance policy.
- Financial Protection: of course, one of the main benefits of takaful is the financial protection those within the pool are offered. This means policyholders have protection against unexpected events via the insurance policy and their business. product and asset collection can be covered.
Takaful In The United Kingdom
Takaful has increased in popularity in the United Kingdom with the increase in consumers and investors looking for ethical and alternative insurance options to protect assets and manage risk. Globally, there is also a demand for takaful projects, including in Kenya, the Middle East, South East Asia, and the wider African region.
In the UK, takaful insurance products are available and offer protection for a variety of risks such as life insurance, motor insurance, and health insurance. In fact, the UK takaful insurance industry has seen significant growth in the last decade.
Takaful Insurance
Those businesses and brokers offering takaful insurance usually work together with traditional insurance companies to create bespoke insurance coverage for their clients. Conventional insurance and investment products are based on underwriting risk. In contrast, takaful is based on co-operation and the pooling of funds.
Takaful insurance that is offered by brokers and businesses is subject to the same regulation as other insurance products. In the UK, takaful insurance is regulated by the Financial Conduct Authority (FCA).
Anyone looking for takaful insurance in the UK should ensure they approach reputable brokers and those who understand the concept of Islamic finance and Sharia law.
When doing research you can visit the website or online platform of the company offering the takaful insurance so you can assess how the company prices and offers the takaful product and find all the information you need.
Takaful is a great financial planning option for those people who want insurance cover that is Sharia compliant and aligns with ethical values.
Stay informed on finance
