Fateful decisions

Everyone leaving a position faces significant decisions that will affect themselves and their family throughout their retirement years.

Orit Kruezer (photo credit: ARIEL BSOR)
Orit Kruezer
(photo credit: ARIEL BSOR)
‘Optimal pension counseling and retirement planning for us is when our client knows and understands all the rights and benefits available to him and chooses the ones most suitable for him.”
This is the statement made by Orit Kruezer, one of the senior members of the Pension Advisory and Retirement Planning Department team at Bank Hapoalim, and herself an expert in the field. As a pension consultant license holder on behalf of the finance ministry, who has in recent years focused on retirement counseling, Kruezer is the first to tell you that a good part of her work and that of her colleagues in the department is to become familiar with all the intricacies of tax planning when retiring.
So how does it all begin?
“Before a person leaves his workplace, the employer will give him a 161 form and a ‘release of money’ letter by the employer. Form 161 is the form that the employer fills out for the Israel Tax Authority when an employee leaves his position, in which he specifies, among other things, the severance pay and/or grants to be paid to the former employee. Additionally, the employer provides that former employee with letters of release for various funds, in which severance pay funds have accumulated. Correct filing of the form by the employer will facilitate the termination process and avoid mistakes and delays in receiving the severance pay.”
And when do you enter the picture?
“In the first stage, we cross-check information received from the pension clearing house compared with the data that the employer filled out in form 161.  If there isn’t a match, we perform an examination and, in most cases, refer the employee to the employer to amend the form.”
What options are available to employees who leave their positions?
“The employee has to consider whether he wishes to withdraw severance pay in full or in part, whether to take advantage of a tax exemption on compensation money, subject to the exemption limit, or whether to postpone settling the accounts. These are weighty decisions, and therefore it is important that he makes them only after he is exposed to all the possibilities available to him and after he understands their significance. How many people know, for instance, that choosing a ‘compensation continuum’ track means postponing payment of tax on compensation money to the date of termination of employment at your next employer, or at the latest upon retirement? How many people know that the use of an exemption on compensation will reduce the ‘capital exemption’ in the future that the employee is entitled to upon retirement, subject to tax rules of course.”
And if he chooses a tax layout?

“A tax layout allows for the employee to deploy his taxable severance pay over a period of a few years –up to 6 years and in accordance with his accrued seniority. It is possible to conduct the layout over the next few years or retroactively. The layout can decrease the tax payment, and therefore in most cases it is preferable. Another solution is ‘fixation of pension rights’ and this is relevant to anyone who reached the age of retirement – 62 for women, 67 for men – and commenced receiving monthly pension.” 

“The employee‘fixates’ the rights he is entitled to for allowance and chooses where to receive tax exemption – whether it will be on the monthly allowance or on tax-free allowance capitalization. The decision that the employee makes at this stage will accompany him for the rest of his life. He can change his decision up to 120 days from the ‘age of entitlement,’ and then he can no longer change his mind.
So, these are very important decisions.
“True. Important decisions that require deep knowledge and understanding of the various tax benefits that the retiree used until he began receiving retirement pension, understanding of ‘exempt capital’ that is available to him at that time, and how to correctly choose the entitlements available to him. In most cases, the retiree that comes to us in order to receive pension advice and retirement planning does not have the full knowledge of his rights and privileges, and therefore the value of such counselling is very high and the look of gratitude after consultation is worth it all.

Disclaimer: the bank is not a tax adviser. Everything stated above only comprises general information and explanation, that does not constitute pension advice, investment advice of tax advice, and it does not replace personal advice subject to provisions by law.