The rise of Sharia compliant retirement planning

Retirement Planner | 28 Aug 2012 | 14:27
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Fiona Murphy looks at the growing interest in Islamic pension products and SIPP investments

Ask most fund managers what people invest in and they will say equities. Whether through pension or other investments designed to leave a nest-egg for retirement, FTSE 100 companies dominate portfolios and provide the assets under-pinning financial products.

But look closer at these companies. Many will have links to activities and products such as alcohol, gambling and entertainment and can be out of bounds to the Muslim client.

Aside from strict investment choices, Sharia law also prohibits the paying and receiving of interest for profits- or receiving an increase on a loan. This rules out many mainstream financial products and investments.

As Yasin Patel, consultant at Mattioli Woods explains: "A strict Muslim couldn't borrow money from the bank because of interest. Straight away, it prejudices that individual. The planning is huge around it."


This means planning for retirement can be a real challenge. Take annuity purchase- in most clients' cases- the lynchpin of retirement planning. Annuitisation is ruled out under Sharia Law for two reasons. Firstly, it involves an increase in payment over time. Secondly, hedging against factors such as longevity can be seen as gambling.

As Jo French, managing director of Pointon York says: "One of the barriers interestingly enough is a lot of savers haven't got a transfer pot - they haven't necessarily had a pension before in order to consolidate.

"If they are committed, to the Islamic wealth cycle that would have been one of the reasons they wouldn't have paid into a pension before," says French. "It's getting to that minimum level where the numbers work so it's a sensible investment for them."

But changes to pensions have opened the market up to Muslim investors. The removal of compulsory annuitisation at age 75 is one such factor, and is feeding into the SIPP market, which can be used as both an investment and decumulation vehicle.

Mattioli Woods launched a Sharia compliant SIPP last year and uses a panel of independent scholars to ensure compliance. Pointon York has also set up a SIPP accredited by the Islamic Bank of Britain.

A SSAS can also be a good solution and can be Sharia compliant. With many Muslim investors averse to borrowing, using a SSAS to loan back money to a business can provide relief.

Sharia compliant investment has had a strong focus on property purchase - again because it does not accumulate interest, it is seen as a trade. Sharia compliant investment funds took off prior to the property boom but there have been issues since the market crashed.

Patel says: "As property is arguably one of the easiest assets to monitor in terms of Shariah compliance, this was the main underlying asset class for most of the Shariah compliant [investment] funds, which naturally took a big hit during the sharp fall in property prices. Therefore some people are reluctant when they hear about Shariah compliant investment vehicles as they feel they may suffer similar consequences."

According to Patel, using a SIPP structure and allowing the client to make decisions about investment choice - particularly where commercial property is concerned is far more effective.

He says: "The SIPP route is more favourable due to the tax relief an individual receives on pension contributions. Coupled with the fact there is no income tax or capital gains tax within a SIPP means the accumulation of capital is quicker in the SIPP environment."

But some Sharia investors will still use equities for their retirement funds. Pointon York offers a wide range of investment choice.

French explains: "There's a fund manager called Montague Capital who runs a series of model portfolios on the paying in platform that allows the Sharia compliant E-SIPP to be used. [The portfolios include] Sharia compliant institutional and retail funds and they manage those according to risk ratings. That's the default or E-SIPP offering.

"And beyond that, there are selections of funds which individuals or advisers may choose. Some of them are institutional and some of them are retail - and commercial property. And [we also see a lot of] in-specie contributions to stay in line with the £50,000 limit."


For Patel, the real attraction in using a SIPP is its flexible nature.

"HSBC, Islamic Bank and Scottish Widows. You can literally hand pick ready-made funds if that's what the client wants. But with our SIPP, they've always been more bespoke so it's more about commercial property or using a SSAS to loan back to your company, because that is Sharia compliant."

However, some Sharia compliant funds can be seen as high on risk and low on reward due to the nature of what they are investing in. Paul Todd, head of investment policy at NEST describes the performance of their Sharia fund, which will be used as an option in auto-enrolment.

He says: "Our latest figures for end of June show the Sharia fund has now grown 3.21% since inception, which relative to the NEST Retirement Date Funds is slightly lower. This neatly summarises how we expect the NEST Sharia Fund to perform in the short to medium term.

"There is likely to be much more volatility than the NEST Retirement Date Funds. This is because it is currently only invested in a single asset class (screened world equities), which while being a growth asset, carries higher probabilities of falls in value."

However, Tariq Aziz, financial planner at Guardian Wealth Management questions whether offering particular products or pension funds deemed to be Sharia compliant, as opposed to planning opportunities is the right way to go.

He says: "The emphasis I have is not necessarily on the product, and I think that's something the Islamic world has confused. The approach has always been we haven't got a product, so they create a product and assume Muslims will just take the product.

"But they don't actually think about the client's needs in terms of whether it's relevant. The process itself has to be Islamic. You have to engage with the client, you've got to have integrity, you've got to be trustworthy."

In addition, the taking of death benefits is something that the adviser has to make sure is consistent with Sharia law.

French says: "Under traditional retirement planning, you take into account your expression of wish and estate planning. Under Sharia law, it's quite proscribed in the community and the part of Sharia law most important to them in the community is how the death benefits are distributed and that's often recorded in the Islamic will.

"Under our SIPP, the expression of wish has a section asking do you want your death benefits to be recorded as your Islamic will. When we were working with the Islamic Bank of Britain, this was quite important."

Demand and future growth

French admits the Pointon York SIPP has been slow to take-off but interest is growing.

"It's been a slow burner because it's new. We've seen much more interest -very much on a word of mouth basis. So someone wants to read through it and understand the detail, because pensions are one thing that has not been catered for in a Sharia compliant way, and there's a balance between the cost and the investment."

Patel agrees: "Demand has been quite good. I've got in front of a lot of professionals I probably wouldn't have gotten in front of [in the past]. Some practising Muslim professionals tend to stay away from pensions, insurance and conventional banking products.

"By providing a product that ticks the boxes from an ethical and religious perspective, [we can] communicate to a wider audience. We are also seeing interest from non-Muslim accountants who want to be able to offer the same tax planning to their Muslim clients."

In terms of auto-enrolment, Todd says: "We don't know exactly what proportion of our members will choose the Sharia Fund but expect the majority to remain in the NEST Retirement Date Fund they are automatically invested in, perhaps up to 90%."

As auto-enrolment isn't fully under way, it is difficult to measure how many people will invest via NEST's Sharia Fund, as opposed to the default retirement fund."

But Aziz believes simply recommending products could mean Islamic finance and retirement planning could get stuck "unless we transition into the mainstream, and the only way we can do that is bring on qualified IFAs and trust them be competent."


Categories: Income

Topics: IFA|commercial property|Mattioli Woods|alternative investments|Pointon York|Islamic finance|Islamic Bank of Britain|Shariah law|annuity market|NEST|Guardian Wealth Management |auto-enrolment|SIPP|Retirement|Ethical

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