Israeli law requires that full-time workers who have worked for longer than six months receive a pension plan through their employers. This is part of the government’s plan of making sure individuals have private pensions to supplement their governmental pensions. Pensions are a highly regulated field, and as such the details are in constant flux. Check with your pension administrator or insurance agent for the updated specifics related to your individual plan.
The Israeli government requires employers to offer a pension plan that provides a monthly benefit. Both employer and worker make contributions into the plan, and the employee’s contributions are paid from pre-tax shekels, providing a substantial tax benefit.
Standard pension plans are often split into several parts: savings (towards the eventual pension payments), life and disability insurance, and severance pay.
Within certain limitations, the employee may elect how the premiums are apportioned, and choose among different asset allocation models. Not every pension plan has every option, so be sure that you understand all the details of your specific plan.
Typical plans include:
Bituach minahalim – contains savings, insurance (both life and disability), and severance pay, Kupat gemel – tax-free savings plan without the insurance element,
Keren pensia – similar to a bituach minahalim plan, but the savings component here is in a joint fund (as opposed to being managed individually).
Customize your pension plan to your needs
The contents of your work-related pension plans should fit into your asset allocation model. If you own life insurance directly with an insurance company, you may prefer to focus your bituach minahalim on savings (especially with their tax-deferred advantage) and minimize the insurance dimension (which may cost more in the plan than if bought separately).
Some employers also offer a tax-beneficial savings plan called Keren hishtalmut, which uses money set aside by both the employer and the employee. These funds are closed for six years, and there is a tax penalty if withdrawn during this period. Though originally intended to be used for continuing education purposes, often people use it for other recreational purposes. However, the wisest course may be to use it for retirement.
The investment structure within a plan is chosen by the employee. The insurance companies are governed by regulations on how they can invest the funds, but it’s up to the employee to choose the specific investment allocation model. Make sure you periodically re-evaluate how your funds are allocated, since what could have been an appropriate fund when you began investing may no longer be the best choice for closer to retirement.
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Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published October 31, 2017.