Have you already thought about your retirement provision? How do you want to finance yourself in retirement, and what standard of living is important to you? Are there any Islamic guidelines that you need to follow to ensure that your retirement provision is halal? Whether you rent or own your home, the costs for renovations, taxes, energy, or food will always remain, and your state pension will only be a fraction of what you currently earn. The difference between your current income and the income available to you in retirement is the pension gap, which is widened by inflation and other factors. It’s wise to plan your retirement savings at a young age and start building them up as early as possible. To close the pension gap and secure yourself financially in old age, you can rely on other sources of income in addition to the statutory pension. In this article, you will learn how SUKUUK can help you with this.

I. The three pillars of old-age provision

The German pension system consists of three pillars. Experts in politics and economics recommend basing pension buildup on these three pillars. What are these pillars, and to what extent are they compatible with the principles of Islamic finance?

The three pillars are as follows:

1. Statutory pension insurance
2. Company pension plan
3. Private pension provision

Statutory pension insurance 

Statutory pension insurance is mandatory for every employment relationship. Pension contributions are paid by employees and employers and flow directly into the statutory pension fund. In accordance with the pay-as-you-go system, your pension payments are not saved but passed on to the pensioners of today. In this way, you will receive your pension later from the contributions of future employees. The monthly pension you receive at retirement age depends on the amount and the number of contributions you have made. In addition, the amount of your pension also depends on the economic situation, demographic trends, and, ultimately, political decisions. The more young people who contribute to pensions, the more money the state has available to provide for pensioners. With an aging society or a poor economy, the pension system falters. Simply put, if the state coffers are empty, the state lacks the necessary funds to fulfill its pension promise.

If we look at the 1889 age pyramid, we see that the graph actually represented a pyramid. Society consisted of many young contributors and far fewer retirees. Now, due to low birth rates and longer life expectancy, the pyramid shape has become more like an urn shape. More and more pensioners have to be borne by fewer and fewer contributors.

From Deutsche Bundespost – scanned by Link

This stamp issued by Deutsche Bundespost shows the age structure of the German population in 1889, 1989, and 2000.

Dynamic build-up of the age structure of the German population between 1950 and 2070

Source link

Company pension plan

The company pension scheme (bAV) is voluntary. The employer can offer it to their employees as a supplement to the statutory pension. It is regulated by law; the contributions are tax-privileged and are exempt from social security contributions up to a certain amount. The employer pays the pension contributions into a pension fund (e.g., pension fund or direct insurance). The employee can also make additional contributions to the occupational pension plan. The pension provider usually invests pension contributions to increase them and generate a return. The amount of the subsequent pension depends on the amount of the contributions paid in, the duration of the contribution, the level of administrative costs, and, of course, the return generated by the investments. Even though the pension provider is legally obligated to invest capital safely and profitably, returns and earnings can fluctuate, or losses can occur. 

Private pension plan

A private pension is another voluntary way of providing financial security for your old age. How you structure it is up to you. There is a wide range of options, and you decide for yourself how you want to make private provisions. There are state-certified and subsidized pension products, such as the Riester or the Basis Rente (Rürup Rente). There are also pension or life insurance policies. You can invest in real estate or buy shares, or save money in the traditional way and put it aside, although inflation will reduce your savings in the long term. 

Are the three pillars of retirement provision compatible with Islamic rules?

The basic idea of statutory pension insurance is similar to the Islamic takaful principle. In a remote sense, it is also built on the principles of mutuality, solidarity, and community. Every employee in Germany not only has the right to statutory pension insurance but also the statutory obligation to contribute part of his or her salary to the pension fund. 

Company and private pension plans, on the other hand, are voluntary pillars. You should carefully consider whether these are compatible with your ethical and religious values. The main problem is that with traditional pension products, you cannot be sure that your money is invested in accordance with Islam. Annuities and life insurance policies offer you the prospect of a lifelong pension, and most of them provide for an interest payment. None of this is compatible with Islamic finance. In islamic finance, riba (interest on loans), gharar (great uncertainty) and unethical businesses are prohibited.

With Islamic finance companies, such as INAIA and SUKUUK, you can rely on financial solutions for your private pension provision that have been tested and certified by recognized Islamic institutes. 

II. Can you use SUKUUK for your retirement planning?

With SUKUUK, there is now, for the first time, the possibility to invest directly in real estate that is selected by you in an sharia-compliant way and to use the returns in retirement. SUKUUK is a halal-certified online crowdfunding platform. The platform is unique, as it brings together financiers who want to finance their residential property in a shariah-compliant way with investors who are interested in investing their money in a security-oriented way and independent of the interest rate market. See also our “explanatory video”.

Advantages of SUKUUK as a supplement to pension provision

SUKUUK is not a pension product in the traditional sense. As a SUKUUK investor, you help others finance their desired property interest-free and acquire shares in their property in return. The financier pays you back the money you have made available to him in monthly installments, and you receive your return in the form of a monthly rent. Thus, your capital remains free of interest, and your return is ethical and Islamic. You invest in real estate (i.e., in real values), and you decide for yourself in which real estateyou want to participate. You can invest your money in several SUKUUK financings in parallel and profit from the rental income in the long term. You can also reinvest profits and repayments to acquire larger shares in further SUKUUK investments. In this way, you build up an additional source of income for your old age in the long term, and, at the same time, help more and more people realize their dream of owning their own home interest-free.

A concrete case study

Imagine you start investing €250 per month at SUKUUK at the age of 22. You invest in a new property every month—that’s 12 properties and €3,000 per year. In addition, you reinvest your profits in more properties, and you do this for 45 years until you retire at 67. Depending on the market and the economic situation, the amount of your annual rental return may vary. We have summarized for you in the following table the estimated results that you can expect in the best case (i.e., with optimal market conditions) in the unfavorable case with sustained moderate market development or in the base case with a balanced assessment of the market.

The base case shows that you can receive an average rental return of 4% p.a. with this strategy, given a realistic market development. After 45 years, you will have invested around €377,612 in real estate and will receive an estimated monthly rental income of €1,259 at retirement age, assuming that the real estate investment remains unchanged.

What you get out of this product in the end depends on future market development. Future market development is uncertain and cannot be predicted with certainty.

Conclusion and outlook

Your retirement provision is important. Don’t underestimate the consequences of the pension gap, and take the right precautions in good time to protect yourself as best you can against the risks of poverty in old age. Regardless of whether you are an employee with compulsory insurance or a self-employed person who is completely on your own, design your voluntary pension plan to match your religious and ethical values. With SUKUUK, you get a new, sharia-compliant and unique possibility to provide for your retirement. According to the famous saying of the Prophet Muhammad (s.a.s.) in which he advises a companion to first tie up his camel and then to trust in Allah, trust in God and provision are closely linked. Set the course for your future today.