How to make Shekel-based investments with less tax hassle

For Anglo olim with assets held in retirement funds, the tax charges in Israel and abroad that may be triggered if funds are cashed in and reinvested can be a prohibitive obstacle.

 New Israeli Shekel banknotes and coins are seen in this picture illustration taken November 9, 2021.  (photo credit: REUTERS/NIR ELIAS)
New Israeli Shekel banknotes and coins are seen in this picture illustration taken November 9, 2021.
(photo credit: REUTERS/NIR ELIAS)

After making aliyah, the exchange rate becomes a crucially important aspect of financial planning, since your expenses will now be incurred in shekels. If your income is still in the currency of the country you came from, then this mismatch can create challenges for immigrants.

Of course, overseas assets can always be sold and the proceeds brought to Israel. But for olim from countries such as the UK and Australia with assets held in retirement funds – pensions, SIPPs or QROPS for British olim or superannuation for Australians – the tax charges in Israel and abroad that may be triggered if funds are cashed in and reinvested can be a prohibitive obstacle.

In 2007, £1 bought you about NIS 8.7. By 2022, the rate had fallen to about NIS 4. Therefore, someone whose income and capital were entirely in sterling would have found that their standard of living in Israel had fallen 55%.

Similarly, the Australian dollar has declined from just over A$1 to NIS 4 a decade ago to about NIS 2.3 today, which represents a fall over more than 40%.

This significant decline has had a considerable impact on the standard of living of many Anglo olim who have fallen into this trap.

 New Israeli Shekel banknotes are seen in this picture illustration taken November 9, 2021.  (credit: REUTERS/NIR ELIAS) New Israeli Shekel banknotes are seen in this picture illustration taken November 9, 2021. (credit: REUTERS/NIR ELIAS)

Throughout the same period, one shekel has always been worth one shekel. Therefore, if you can own shekel assets and generate an income in shekels, then you can enjoy the peace of mind that comes from not having to worry about exchange-rate volatility.

Improvements

In recent years, for UK olim, things have improved. It used to be necessary for UK pensions to be subject to tax in Israel to avoid UK tax on UK pensions. Following changes to the UK-Israel Double Tax Treaty in 2019, those who have moved permanently from the UK to Israel have potentially been able to withdraw their pension funds without tax in the UK. In Israel, UK olim can claim an exemption if they became Israeli resident in the last 10 years; after that there are various rules for mitigating or eliminating Israeli tax on their UK pension funds.

However, many British olim are not able to take advantage of this opportunity for a number of reasons:

  • They have a QROPS scheme
  • They have final-salary (also known as defined benefit) pensions, where benefits have not been taken, or
  • They are under 55 years old and cannot access their funds yet.

Similarly, not all Australian olim are in a position where they can draw benefits from their scheme. For instance, if they are under the preservation age of around 60, their funds remain inaccessible.

According to Peter Hersh, a director at Logicca Chartered Accountants in Sydney, “an Australian superannuation fund is a great investment vehicle, particularly for those aged over 65. If they draw a pension from the fund, both the fund’s income and the pension will be tax free in Australia in most circumstances. For those members who are Israeli residents, current advice is that the income of the fund and the pension may also be tax free in Israel, not just during the 10-year exemption period but for life.”

For olim with funds in a UK pension scheme, including a QROPS, or in an Australian superannuation fund, there has not been an accessible shekel solution up until now. This has forced many to choose between ongoing shekel exchange-rate risks (a costly mistake) or significant tax charges to unlock the assets.

A possible solution, which is about to become available, may solve this dilemma. One of the largest banks in Switzerland is launching two “Actively Managed Certificates” in January that will give pension schemes access to shekel assets.

The first will invest in a diversified portfolio of shekel bonds, including Israeli government, corporate, inflation-protected and international bonds. The second will invest in both Israeli and global equities, with all non-Israeli holdings hedged back into shekels to eliminate the currency risk.

Comments

“We have launched two managed certificates so that relevant investors can choose the bond and equity allocations that suit their own attitude to risk with the flexibility to change the allocations later,” said Mike Ellis, chief investment officer at Pioneer Wealth.

Therefore, for investors living in Israel with funds that they either cannot withdraw in a tax-efficient way or they wish to retain for ongoing tax benefits, this solution might meet their need to gain exposure to shekel investments.

As always, consult experienced tax and investment advisers in each country at an early stage in specific cases.

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The writer is a senior wealth manager at Pioneer Wealth.