Short answer
A pension is halal in itself: it is deferred pay for your work. The question is where the money is invested. Choose a Shariah-compliant fund option in your 401k, IRA or workplace pension where one exists. Employer contributions are part of your pay and are allowed, and state pensions like Social Security are permissible to take.
Salary set aside for retirement and the employer's contribution are lawful earnings. Investing them in interest-bearing bonds or haram businesses is not allowed when you have a choice, so select halal funds. For a compulsory scheme the employee does not control, Deobandi muftis, following Mufti Muhammad Shafi on the provident fund, allow taking the full payout, as the extra is a grant from the employer rather than interest the employee contracted for.
The four schools agree on this.
Explanation
A pension is a way of being paid later for work you do now, and there is nothing wrong with that. The issues are in the investment:
- Defined benefit pensions (a set income based on salary and years of service) are paid by the employer from its own scheme. Receiving them is permissible.
- Defined contribution plans (401k, 403b, IRA, most UK workplace pensions) put your money into funds you choose. Default funds usually hold bonds and banks, so switch to a Shariah-compliant fund. Many providers offer one, often called an Islamic or Shariah fund.
- The employer match is part of your pay and is permissible.
- State pensions such as Social Security or the UK State Pension are government benefits you may accept.
If your plan has no halal fund at all, ask your employer to add one, consider a self-directed option, and ask a mufti how to treat the growth you have already received. Annuities bought at retirement are usually interest-based and need checking. Borrowing from your own 401k with interest raises its own questions.
Mufti Muhammad Shafi's ruling on the compulsory provident fund in South Asia is the basis many Hanafi muftis use for schemes where the employee has no say. Where you do have a choice, the safe and correct course is to choose halal funds. For zakat on retirement savings, see zakat on 401k, IRA and pensions; for shares, see Are stocks halal?
Ask a mufti about your own case. This answer explains the general ruling. When the details of your situation matter, as they do here, ask a qualified mufti and give them the full facts. Where to ask a scholar.
The evidence
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
Pension money should grow through trade and halal investment, not interest.
Sahih Muslim 1598
Sahih... آكل الربا وموكله وكاتبه وشاهديه ...
"He cursed the one who consumes riba, the one who pays it, the one who writes it and its two witnesses."
Choosing interest-bearing funds when halal ones exist is taking part in riba.
Where the ruling is recorded
- Jawahir al-Fiqh (Mufti Muhammad Shafi), Treatise on the provident fund. Employer additions to a compulsory provident fund are a grant, not riba.
- Radd al-Muhtar (Ibn Abidin), Kitab al-Buyu', section on loans (fasl fi al-qard). Every loan that brings the lender a stipulated benefit is riba.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.