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I explain why UK Shariah compliant lifetime annuities are hard to provide.
Posted 27 January 2026
Pensions, both those provided by the state and those provided privately, are a major issue in almost all countries. Last year the UK Government announced that it would be reviewing the market for Shariah compliant pensions.
I wrote about this review, with some related thoughts, in my February 2025 column for the magazine "Islamic Finance News." You can read it below.
In my 3 July 2024 column written immediately before the UK’s general election, I wrote: “My expectation is that a Labour government will take Islamic finance far more seriously than the Conservative Party has during the 2010 – 2024 period.”
After eliminating the Shariah compliant refinancing trap as explained in my 6 November 2024 column, the Government is now reviewing the Shariah compliant pensions market. As an indicator of both seriousness and complexity, three government departments are involved:
In the UK and around the world, state pension provision is covering a smaller proportion of retirees’ income needs. This means individuals need to save more for their own retirement.
However, pension savings also matters also for the economy. Where pension schemes invest their large funds directly affects economic growth. That is why the Chancellor of the Exchequer Rachel Reeves is putting so much effort into merging small local government pension schemes to produce larger pools of investable funds.
Growing individual pension savings is also means more business for financial services firms who operate pension schemes and for asset managers who invest the funds.
Despite the complexity of pension funds (remember the training needed to become an actuary), there are only two key issues.
There is already a range of Shariah compliant equity investment funds, but in the UK it is far smaller than for conventional funds which also have more esoteric options such as venture capital and private equity.
What proportion of the pot should be invested in fixed return investments such as sukuk? That depends on the saver’s risk tolerance.
During my savings phase, I was 100% equity invested because pensions have a long time-horizon, and I don’t get upset by temporary falls in the value of my investments. However, most people have a lower risk tolerance.
I outlined the question in my 13 April 2016 column. Nearly nine years later, the issues are still the same.
The UK used to require the purchase of an annuity once you started to withdraw money from your pension scheme. However, about a decade ago, the rules were sensibly liberalised.
You can now purchase an annuity as before or you can leave the fund invested (in any mix of permitted investments) and take either regular or occasional withdrawals of money from the fund. This is called “income drawdown.”
Income drawdown is what I have chosen because my wife and I don’t expect to spend all of our pension pots during our lifetimes. The residue will be left to our children or to charity. However, individuals with smaller savings face the risk of living longer than the money in their pension fund. Accordingly, they need to be able to buy a lifetime annuity.
Designing a Shariah compliant annuity using takaful concepts is not difficult. The problem is the unavailability of long-term sukuk.
If you are going to sell a lifetime annuity to a 60-year-old, who may live for another 40 years or more, you need to back that annuity by investing in sukuk whose life is, say, 50 years. They just don’t exist, certainly not in the volumes required. Creating them could be a major opportunity for companies and governments seeking long-term finance.
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.
