How to coddle your nest egg

A choice of pension vehicles can help prepare for a viable retirement.

By JOHN BENZAQUEN
money 88 248 (photo credit: Courtesy)
money 88 248
(photo credit: Courtesy)
The pension industry in Israel has undergone tremendous changes. Until quite recently, the only pension funds worth their salt belonged to the Histadrut. And they were voluntary: It was up to you if you wanted to join. Four years ago, those pension funds were nationalized, and the government guaranteed the pensions of those who had made the monthly payments. At the same time, the government authorized the setting up of privately run pension funds, called "new pension funds." Today, every employee in Israel must make monthly payments into a pension fund. There are three different vehicles: 1. The old pension funds are now frozen - i.e., they cannot receive new members, but those already in the system will receive their pension upon retirement. 2. The new pension funds are partly guaranteed by the government and arrangements by insurance companies, which also have plans that can be regarded as pension funds. 3. A selection of other types of plans is available for those who want to put money away and live off the income derived from it. New pension funds The new pension funds are built on a sound financial foundation. The old funds paid out a pension that was based on the number of years payments were made, multiplied by two. So, for example, 25 years of work entitled one to a pension amounting to 50% of the average salary; 35 years of work to 70%, which was the most that one could get. The new pension funds provide a pension based on the assets accumulated by each member. The assets of the old pension funds were invested in fixed-interest government bonds linked to the cost of living, with an annual yield of 5.5%. With the new pension funds, 70% of one's salary is invested in the financial markets, where it can be more profitable. The new pension funds are more flexible. The pension they pay out depends on the yield of the investments. Thus fund managers have to make sure their investments are sound and profitable, otherwise members will want to transfer to more lucrative pension funds. This may be a cause for concern for those who have been making payments for 30 years to provide an income in their old age. Money markets are very speculative, and it is possible that a pension worth, say, $200,000 can shrink. And that is what is happening now. The new pension funds are regulated. Some 30% of the assets are invested in special government bonds, which are solid. Most of the rest is invested in corporate bonds. But today, even corporate bonds are going through difficult times. The pensions are calculated on payments made over the years. The 70% ceiling is no longer effective. This means people can plan their pensions according to their anticipated needs, not on the basis of the salaries they earned in the past. And that is a big improvement. Ronen Tov, general manager of the New Makefet Pension Fund, explains, "While the old pension funds were more stable in that they were based on safe, high-yield government bonds, the new funds can be more advantageous to members. In cases where payments are made from an early age, the pension that will be paid out can be very high." While in many cases pensions that will eventually be paid may be high, it is doubtful whether the pension will be greater than the employee's last salary, since most salaries increase over time. If someone started working at age 20 and made regular monthly payments based on a monthly salary of NIS 10,000 until age 67, he would receive a monthly pension of NIS 12,000. If the payments started at age 25, his monthly pension would be NIS 9,555. When they start at 30, the pension falls to NIS 7,414; at 35, the pension drops to NIS 5,762 a month. For those starting at 45, the monthly pension falls to NIS 3,250. Payments made into pension funds must amount to 17.5% of a monthly salary. These are tax deductible, provided the monthly salary does not exceed NIS 17,000. Those who want to make higher monthly payments because they want a larger pension must make other arrangements. Diverse financial vehicles There are many investment tools that allow people to augment the pensions outside the "safety net" pension plan. Provident funds, for example, allow for long-term savings, and the payments are tax deductible. At age 67, one can pay a lump sum to a new pension fund, which will ensure a pension for the rest of one's life. Every NIS 200,000 will buy a monthly pension of NIS 1,000. But provident funds are more speculative than pension funds. Unlike pension funds, 30% of their assets are not underwritten by the government. They are more flexible, though, because they have various investment patterns. Some are heavily oriented toward stocks and, as such, are highly speculative. At present, the value of these assets has fallen; but before the crisis, they yielded annual returns of nearly 10%. There are also provident funds oriented toward foreign currencies, bonds, etc. These are more solid. And nowadays, one can transfer money from one provident fund to another without losing any of the long-term benefits.