Ajmal Bhatty
Promoter of Ethical Financial Solutions
Founder of World-Of-Takaful

The UK faces a growing pensions gap, with two million pensioners currently living in poverty—a figure expected to double in the coming decades. The state pension is lower than in many advanced economies, with an overall net replacement rate of 58.1%, below the OECD average of 69.1%.

A shift in pension provision has led to 90% of employees relying on defined contribution (DC) pensions, while only 10% have defined benefit (DB) pensions—a transition known as ‘the Great Risk Transfer.’ This shift places greater financial responsibility on individuals, exacerbating pension adequacy concerns.

These are some of the key areas of UK’s Pensions Gap:

1. Gender Disparity: Women retire with 55% less savings than men, and their retirement incomes are projected to be 30% lower.
2. Retirement Savings Shortfall: The average UK pension pot is £166,000, but women’s average pension savings are only £115,000.
3. Housing & Retirement: The number of renters aged 25–64 has increased by 21% in the past decade. This trend affects retirement security because renters often lack the financial stability and long-term equity that homeowners build through property ownership, making their future housing and financial situation potentially more uncertain as they approach retirement.

Strategies to Close the Pensions Gap

1. Start Early: Encouraging pension contributions from a young age to maximize compound growth.
2. Maximize Employer Contributions: Employees should take full advantage of matched contributions to boost savings.
3. Improve Pension Awareness: Financial education campaigns can help individuals make informed decisions about their retirement.
4. Policy Reforms: Government intervention to increase minimum pension contributions and enhance pension adequacy.
5. Addressing Structural Barriers: Employers, trustees, and pension providers must remove obstacles that prevent individuals from saving adequately.
6. Addressing the big missing piece: Shariah compliant pensions option.

Shariah-Compliant Pensions: A Missing Piece

Many Muslims in the UK reluctantly invest in conventional pensions due to the lack of Shariah-compliant options. A significant portion of the UK’s 3.9 million Muslim population (84.5% under the age of 50) would prefer ethical, Shariah-compliant pension schemes if available. One-third of Muslim employees do not have a workplace pension, with 78% citing concerns about Shariah compliance. The Muslim pension gap is estimated at £11.5 billion, with 206,720 working Muslims lacking pension savings.

Challenges in Pension Accessibility:

– Many employers fail to offer Shariah-compliant pension schemes, forcing Muslims to either opt out or compromise their beliefs.
– Lack of awareness about pension tax benefits and employer contributions leads to low participation rates.
– Existing Shariah-compliant pension offerings are limited to single equity funds, lacking risk management strategies found in conventional pensions.

Case Studies: Muslims Facing Pension Challenges

Case Study 1: The Workplace Dilemma

A Muslim employee working in the finance sector struggled with pension choices. His employer only offered conventional pension schemes, which included investments ininterest-based financial instruments—prohibited under Islamic law. With no Shariahcompliant alternative, he opted out, missing out on employer contributions and tax benefits, leaving him financially vulnerable in retirement.

Case Study 2: The Self-Employed Struggle

A Muslim entrepreneur running a small business wanted to invest in a halal pension scheme but found no accessible options. Without a workplace pension, he relied on real estate investments, missing out on tax advantages and structured retirement savings. His financial planning lacked long-term security, highlighting the urgent need for diversified Shariah-compliant pension products.

Case Study 3: The Gender Pension Gap

A Muslim woman working part-time faced double disadvantages—the gender pension gap and the lack of Shariah-compliant pension options. She was hesitant to invest in conventional pensions due to ethical concerns but had no viable alternative. As a result, her retirement savings were significantly lower, exacerbating financial insecurity.

Challenges in Shariah-Compliant Pension Availability

  • Limited Options: Few master trusts offer Shariah-compliant funds, leaving Muslim employees with no viable alternatives.
  • Employer Neglect: Many employers fail to provide faith-aligned pension schemes, forcing Muslims to either opt out or compromise their beliefs.
  • Lack of Awareness: Many Muslims are unaware of pension tax benefits and employer contributions, leading to low participation rates.

Solutions to Bridge the Gap in Shariah compliant pensions

1. Government & Industry Collaboration: The UK Treasury and Department of Work & Pensions are reviewing the market to expand Shariah-compliant pension offerings.
2. New Pension Models: Currently there are very few schemes providing options in the accumulation phase for Shariah compliant pensions. These are Smart Pension in collaboration with Wahed, Nest, Peoples Pension, PensionBee and Unbiased Independent Financial Advisers Ltd. Aviva provides a glidepath strategy that gradually reduces risk as members approach retirement, using funds from HSBC’s Islamic range, including Sukuk bonds and Shariah-compliant equities.
3. Employer Responsibility: Businesses must offer Shariah-compliant pension options to ensure financial inclusivity for Muslim employees.
4. Community Engagement: Surveys and consultations with the Muslim community can help shape policies and increase accessibility.

Final Thoughts

The UK’s pensions gap is a systemic issue requiring urgent action. While policy reforms and financial education can help close the gap, addressing the non-availability of Shariah-compliant pensions is critical for ensuring equitable financial security for all.