Are Heirs Entitled to a Pension Fund?

Answered by Shaykh Muhammad Carr

Question

Is it permissible for heirs to receive payments from a pension fund that is not regarded as part of the deceased’s estate under Islamic inheritance laws, given that the deceased did not possess ownership of the funds during their lifetime?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

Thank you for reaching out and seeking clarification on this important matter.

The ownership of the pension fund is a contentious issue. There are, by and large, two views regarding pension funds:

1. They form part of the estate, and
2. It does not form part of the estate.

Moulana Taha Karaan opined that the employee’s contributions form part of the estate, subjecting them to Islamic inheritance laws. The employer’s contributions, on the other hand, do not form part of the inheritance. [MJC Position on Succession Law and Related Matters]

In my estimation, and Allah knows best, the pension fund does not form part of the estate as the fund owns the employee and employer contributions, akin to a waqf with rules by which contributions are made. As such, the employee’s ownership entitlement is relinquished at the point of contribution.

Pension Funds Form Part of the Estate

• The proceeds of funds such as the above are typically made up of two portions: (a) a portion that came from the deductions from the employee’s salary; and (b) the portion that would have been contributed by the employer.
• On each of these two portions, there would also be growth that accumulated through the investment over the years
• Unless Shari‘a compliance was ensured, the part of the payout that originated from returns on investment would have been contaminated to a certain degree.
• Before inheritance can be considered, purification of the payout should first be undertaken by removing from the growth on the fund any amounts that accrued from investment in prohibited avenues. Where actual facts and figures are accessible, they should be used; otherwise, discretionary percentages should be resorted to.
• The portion of the purified payout that is subject to inheritance is only that which represents deductions from the employee’s salary and growth thereupon since his claim to ownership thereof is rooted in remuneration for labor.
• The independence and separateness of the legal structure used to house the fund (eg. trust) amounts to a legal fiction which, in a manner strongly reminiscent of the company, is resorted to for expedience, but does not alter the underlying reality of ownership.
• Employers’ contributions and growth on it will not form part of the estate since the deceased did not at any moment up to his death have the type of entitlement to it that amounts to ownership in the Shari‘a.
• On the portion represented by the employers’ contribution and growth on it, the beneficiaries by law may come to a settlement among themselves in which they are not necessarily guided by the strictures of the Islamic law of succession. [Ibid]

Pension Funds Do not Form Part of the Estate

• Pension funds are regulated under the Pension Funds Act (No. 24 of 1956).
• Pension funds are juristic entities similar to a waqf (endowment)
• They are managed separately from the employer’s assets, often in a trust-like arrangement.
• Employee contributions cannot be considered coerced, as they do not meet the criteria for coercion.
• At most, the employee is compelled to act in a way that ultimately serves their best interest.
• Once contributions are made, the employee relinquishes ownership, and the fund assumes full ownership.
• The benefits provided by the pension fund cannot be reduced, transferred, or subjected to legal execution.
• As a result, pension funds do not form part of a deceased individual’s estate and instead belong to the designated beneficiaries.

I pray this is of benefit and Allah guides us all.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Dr. Muhammad Abu Bakr Badhib

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.