We are living much longer and our life expectancy could continue to increase. Of course, some of us die prematurely and it important to protect our families. The problem with living too long is that we can outlive our money. Consequently, there has been a tendency over the last few years for the Treasury to push to provide retirement income.
A few years ago, a compulsory pension was introduced for salaried people, and this is expected to be extended to the self-employed as well. The payment that the employer and employee make increases every year. In 2011 the employer pays 3.333 percent of gross salary toward severance pay, 3.333% to a provident fund, and a matching 3.333% is paid by the employee toward a pension, making a total 10% of gross salary.
It remains to be seen how this law will be enforced, but the employer
can presumably sue for the cover he would have had if a suitable pension
program had been in place.
Employees should check the annual confirmations they should receive from the relevant pension/provident funds.
Socially, a compulsory pension is commendable. The question is what is
the cost? Marginal industries might have to close down or emigrate! All
retirement savings have to be taken as a monthly payment if tax benefits
are to be enjoyed.
Above a monthly retirement payment of NIS 3,850, a lump sum can be taken.
Some employers provide more than the minimum compulsory pension
mentioned above. In many cases it is customary or agreed that an
employer may pay up to 8.33% of an employee’s salary into a
severance-pay fund and 5% into a provident/pension fund, as well as up
to 2.5% to cover loss of work ability.
The State of Israel is applying a “stick and carrot” approach.
It wants to ensure that citizens have a minimum income in old age. To
this end there are tax benefits for salaried employees and the
• Employees: The above payments are generally tax
deductible for the employer, but, more importantly, they are not
regarded as taxable income in the hands of the employee.
If the employer contributes 5% to a pension/provident fund, the employee
must match the employer’s 5% contribution to the provident fund.
But he is allowed a tax credit of 35% within certain limits, so he may pay 3.25% net.
Various rules and monetary limits apply. In addition, the
pension/provident fund must be approved and regulated in Israel, so no
Israeli tax benefits apply to contributions to foreign pension plans
because none are currently regulated in Israel.
• Self-employed (freelancers): A self-employed person can put up to 16%
of his income into an approved Israeli retirement program and get back
about 30% from the Israel Tax Authority, depending on how much tax he is
paying at the margin.
Part of the payment is allowed as a deduction from income under Section
47 of the Income Tax Ordinance, and part is allowed as tax credit under
Section 45A of that law.
Again, detailed rules and limits apply.
• Major shareholders: A separate category of people are major
shareholders (baalei shlita); i.e., people who own more than 10% of a
Baalei shlita enjoy the benefits of the self-employed, and their
companies can also contribute to a severance pay fund. Strict limits
WHERE DO YOUR CONTRIBUTIONS GO?
All of the above is highly simplified and there are many variations.
Once contributions are made into a plan, where does the money go? There
are several possibilities, including the following:
• Approved provident
fund (kupat gemel) at a bank: This used to be very popular, especially
if they paid out lump sums. But these funds may not pay out monthly
payments at the end of the day and may have to transfer the funds to a
program that can.
• Pension funds: In the past, Israeli pension funds were not actuarially
based; they took in money and paid out money, often without doing the
proper arithmetic. The result was that there was no way they could meet
their future obligations, and they were in fact bankrupt.
The state bailed them out and offered certain guarantees to existing members.
There are a number of advantages to a pension fund.
The management fees are often low, and members, particularly young ones,
enjoy very cheap group life and disability insurance. That the fund has
to balance actuarially means it should not go bankrupt.
On the other hand, you don’t always know exactly what you will get when
you retire. The payment you receive will obviously be affected by the
return on the money you have invested. More importantly, it will be
influenced by life expectancy. The fund is governed by regulation, and
when you retire you will be paid out accordingly.
• Annuity with an insurance company: An advantage of an annuity is that
there is a contractual obligation to the policy holder. The most
important element of an annuity is the conversion factor. This means how
much money you have to accumulate to get a monthly payment of, say, NIS
1,000 for the rest of your life (not less than 240 payments).
In the past, you had to accumulate NIS 144,000 and then NIS 166,000.
Today it is about NIS 200,000. The amount varies slightly from company
to company. Israel is the only country in the world where there are
these guarantees, and recent reports indicate that there are plans to
The return on your money is important, but if the lifeexpectancy
increases in coming decades, this guaranteed conversion factory is
• Study fund (keren hishtalmut): For some people, this is the ultimate
Israbluff! Originally the study fund was intended to enable academics to
study in their sabbatical year. But when others saw how good it was,
they also wanted it. Today many employees with reasonable salaries and
self-employed people have this benefit.
As a study fund is partly a tax dodge, attempts were made by the
Treasury to stop it, but they were called off to avoid a national
strike! Where a studyfund arrangement exists, the employer usually
contributes 7.5% of gross salary, matched by 2.5% by the employee.
Again, detailed rules and monetary limits are prescribed.
On the Israeli tax side, if all relevant conditions are met, the
employer’s contribution is not taxed. The money goes into an investment
The employee can influence how the money is invested, and there is no Israeli tax on fund income and gains.
After six years the money in a qualifying study fund is liquid and
available (without Israeli tax) to finance a new car, renovate your
house or go on that vacation. The selfemployed can contribute up to NIS
17,400 a year and also enjoy certain Israeli tax benefits.
There are many study funds on the market and you can move relatively easily from one to another.
As always, consult experienced professional advisers in each country at an early stage in specific firstname.lastname@example.org email@example.com Paul
Roberts is a pensions and insurance specialist at Egoz Insurance
Agencies. Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.