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Fatwa CenterZakat on pension plans
Question
The pension plan in the US under what is know as (401K), is a deduction of one's pay check that goes directly toward selected stocks, where the money is invested on ongoing basis until the age of retirement. During that time, of course there are accumulations on yearly basis. Of course as an investment this saving is subject to gains and losses. My question is: Is a pension plan (401K plan), as a long term saving, subject to Zakaat?
Answer
All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad is His slave and Messenger. We ask Allaah to exalt his mention as well as that of his family and all his companions.
The pension plan as it is mentioned in the question is religiously forbidden as it is an aleatory contract. The participant in such a plan does not know how much he will actually receive at the age of retirement. It could be that he would receive the same amount as he had paid, or more or less than that amount. So this is purely an undefined contract and this is not permissible in Islam. So in this case one should not participate in such a plan if it is optional, but if it is obligatory then it is permissible because of necessity and obligation. Therefore, when one receives the money at retirement he should get rid of the money that exceeds the amount that he had paid into it and pay Zakat only on the amount that he had paid. We draw the attention of the questioner that he should repent to Allaah if he had voluntarily subscribed to this plan. He has to regret what he did and be determined not to return to it again and make every effort to get rid of it if it is not obligatory as we have previously stated.
Allaah knows best.
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