A financial partition plan

Danny Gigi, manager of the Pension Counseling and Retirement Planning Department at Bank Hapoalim, is distressed when employees who have reached benefit age fall into the ‘double taxation trap.'

A Bank Hapoalim branch in Tel Aviv (photo credit: REUTERS)
A Bank Hapoalim branch in Tel Aviv
(photo credit: REUTERS)
If it were up to Danny Gigi, there would be a law requiring all employees to receive pension advice for retirement planning long before they reach retirement age (for men, 67; for women, 62).
“Just like anyone who wants to drive requires a license, anyone who plans to retire requires detailed explanations – many years before ever receiving his first pension payment – about retirement grants, compensation or pension payments that are due him,” says Gigi, manager of the Pension Counseling and Retirement Planning Department at Bank Hapoalim. “This is important so that the retiree will not make any mistakes. Unfortunately, many employees who have reached benefit age and have begun to receive a pension stumble because of a lack of knowledge and fear of the bureaucracy involved in using the exemptions to which they are entitled. We call this the ‘double taxation trap.’ In other words, they pay tax at the time of receiving the pension amount for those funds above the deposit ceilings on which they already paid tax during the pension savings period. These double payments can amount to tens of thousands or even hundreds of thousands of shekels.”
Jerusalem Post: The point is that most retirees are not equipped to deal with these tax issues.
Gigi: This is true. This lack of knowledge is characteristic of many sectors, and it is true even for financial personnel in large companies who do not necessarily understand the complexity of these matters.
Retirement planning involves a wide range of issues, as well as many tax aspects. It is important that retirees be assisted by expert advisers who are licensed by the Finance Ministry, such as our advisers at Bank Hapoalim. The main issue facing every retiree is how to take advantage of the tax exemptions granted, which now stand at up to NIS 739,000, which will gradually increase in the coming years to NIS 1 million. Most retirees don’t know the best way for them to share the exemption between the products and the monies they accumulated over the years. They ask, ‘Should I take advantage of the pension exemption on retirement and compensation grants? Should I take a one-time payment, i.e., dividends, in a way that will enable me to enjoy all the tax benefits and exemptions to which I am entitled?’
There is no single formula; therefore, it is necessary to plan the exemptions according to the individual needs of each retiree, his preference for capital and pension, inter-generational transfers, needs and other considerations.
Post: What would you recommend?
At least 10 years before retirement, visit one of the pension counseling and planning centers in the country or the new national center at the Sasson Hugi Tower in the Diamond Exchange complex in Ramat Gan. This will enable employees to get a ‘snapshot’ of their retirement situation years before they retire, and it is sufficiently early for workers to still make decisions about changing or improving the handling and the distribution of those funds. This will enable employees to get a clear idea beforehand as to the conditions that we can help the client maximize the net from the total financial portfolio that he accumulated during his career. It is important to add that one should save the 106 Forms that were received over the years.

Post: In the last decade, there seems to be increased awareness about retirement planning as part of overall comprehensive pension planning.
Yes, and Bank Hapoalim is leading the way in increasing awareness in this area. It is impossible to be a good pension adviser without dealing with the most critical junction in one’s life – retirement. There lies the greatest value that one will receive from financial consultation. For example, how many retirees are familiar with the term ‘recognized annuity?’ How many people know it is something that is exempt from income tax and even capital gains tax? And how many are aware that they are entitled to this exemption in addition to the standard pension?

Post: For whom is this tax-exempt allowance relevant?
It is relevant primarily for those with an income above NIS 25,000 a month. The exemption is permanent and grants a significant exemption on the allowance. For example, a man who retires at age 67 and has pension insurance in the amount of NIS 2,000,000 (clause 157), of which NIS 600,000 comes from ‘payments that are exempt’ above the ceilings for which tax has already been paid at the deposit stage. In calculating the monthly amount for which the retiree is entitled, part of the stipend – NIS 3,821, or 30% from a monthly stipend of NIS 12,738, will be tax-free. We are speaking, then, of a benefit of NIS 764 per month, and more than NIS 150,000 throughout his life. It sounds complicated, but the bottom line is that this is very worthwhile for both the retiree and his family.

Post: In recent years, have you focused your efforts on retirement planning?
We are concentrating our efforts in this area because of the gaps in the customers’ knowledge of the various regulations and because retirement counseling is an area where the customer sees in a quantitative way the money we have saved for him and the value of pension advice.
How can it be that an employee who deposited money in excess of the deposit ceiling and paid tax on the date of deposit reaches retirement age and is required to pay tax again for these funds because he didn’t know otherwise? If he approaches the tax authorities, he may have difficulty proving his eligibility. He will also find that the insurance companies themselves, in certain cases, may not be prepared to calculate the amount of the exemption for the recognized pension to which he is entitled.