Wa `alaykum as-Salamu wa Rahmatullahi wa Barakatuh.
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
After the end of a long period of service, an employee retires and receives a monthly payment known as a pension. If he or she, leaving behind a spouse and children, they are paid a pension to help them meet life expenses.
Regarding the ruling on receiving a pension and participation in different pension schemes raised in the question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states,
Yes, pension plans are permissible. There are two types of pension plans. In an obligatory plan, which is part of the employment package, you have no choice of the amount of contribution or the placement of the funds of the plan.
The second type is voluntary. Here very often you have the choice to join or not, to determine the amount of your contribution, to change it at any time, and to select among a variety of investment schemes.
In the obligatory plans, you need not to worry about any thing; your relation with the plan is basically based on the actuarial study of the plan population. It is permissible regardless of what the plan management does or in what it invests.
In the voluntary plans, however, a Muslim member must select investment schemes that have least involvement with interest (because it is riba and is strongly prohibited in the Qur’an and the Sunnah). When you receive any payment from the plan, you must estimate the part that is coming from interest and give an equivalent amount to general Muslim charity because interest stains your own money with a forbidden component.
This is not considered sadaqah (charity) but you will, in sha’ Allah, be rewarded for avoiding the riba.
Allah Almighty knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archiveV and was originally published at an earlier date.