how the Israeli pension system works part 1 – what you pay in
November 17, 2009 at 8:18 am 22 comments
Hi. Welcome to Shomer Shekalim’s series about the pension syem in Israel. This series aims to explain the pension system in Israel and empower any Israeli worker to understand the pension system and invest wisely.
Part One: Paying in
Israeli employers usually begin paying into a worker’s pension after 6 months of work, although it can be sooner.
The money paid into a pension is divided into three groups:
(1) the amount the worker invests
(2) the amount that the employer matches
(3) the amount that the employer sets aside for severance (פיצויים). This is similar to the amount that the employer matches, except that if the employee ceases to work for the employer, he or she can take out this money immediately, without waiting to reach retirement age (67 for men, 64 for women).
In recent years, the Israeli government has made laws changing how much must be paid in by both the employer and employee. By 2014, 17.5% of the base salary will be set aside monthly from each of the categories mentioned above. In the meantime, in order to ease Israeli businesses into the rise, the Israeli government set the following rates:
What does this mean? In short, this system will mean that employees will be “forced” into saving more, but will be rewarded greatly. After 2014, the average worker will easily be able to save over ₪ 5,000,000 shekels for his or her retirement – that’s the power of compound interest! Compact interest also means that your pension will contain anywhere from 20% – 30% of all the money you receive from your job over your lifetime.
In Part 2, I will discuss the different types of pension funds (קרנות פנסיה) in Israel. Stay tuned…
Entry filed under: pensions, Taxes, Pensions Etc.. Tags: .
1.
Josh | January 7, 2010 at 7:50 pm
Thanks for the article. Is the “compensation” portion in lieu of severance pay? ie if someone is fired not for cause, is this portion paid out as severance? and do you forfeit it if you leave your job voluntarily?
2.
jonnydegani | January 25, 2010 at 9:06 pm
Sorry I took so long to get back to you. There is still a lot of pension issues that I am learning. Moshe from Israpay mentions this in one of the questions asked on his site:
“Severance pay (assuming you worked full-time) would be one month’s pay for each full year worked. (anything over one year would be pro-rated accordingly)…
Once you have done this, severance pay will be paid – either by releasing your pension account to your control (including the severance pay portion) or if lacking such fund, by way of payment via your payslip by the employer.
If the funds in the pension fund’s severance pay portion are not sufficient to pay you the severance pay you are due, the employer will pay the difference via your payslip.”
So it partially comes from you and partially comes from the employer. From what I have been told, the employer does not have to pay you any extra if you quit, but I think this law has been or will change. Generally speaking, many employers want a clean break and will pay the remainder of the pitzuyim not matter what (but be careful – many will not. Find out your companies policy)
3.
GS | February 16, 2010 at 8:37 am
Thanks for the information.
I just heard that according to the law, the employer can cap the pensionable amount to NIS 7835. So you may not be collecting as much pension as you think you are.
I also just heard that with an increase in the amount you give to the pension, the amount of tax you pay is less. Not sure how that works though.
4.
jonnydegani | February 22, 2010 at 7:47 pm
I called an agent who discusses pensions from the ministry of finance and asked if this was true. The agent told me that there is no cap to the pensionable amount – if you deserve 5%, you get 5%, even if it is a million shekels. Also, the amount you pay in taxes is not less; you are taxed on the money you pay that goes into your pension. The only way there could be less taxes would be if your employer decided to cut your wages but increase the amount HE gives into the pension
5.
brian phillips | April 17, 2010 at 3:31 pm
i worked in isael for 20 years paying every month into the betuach luime sceme,i returned to my home country in 1978 england ,Am i entitled to receive a pension from Israel
6.
jonnydegani | April 19, 2010 at 4:06 pm
Bituah Leumi does not give a pension., but it does give some payments to the elderly in need. I am not sure about the law, but it seems worth it to be to at least go to their website, get a phone number and contact them and see if you can get some money. Worst comes to worst, you are back to where you are now.
7.
Bettina | July 25, 2010 at 10:08 am
After working in Israel for 3 years, I am returning to my home country. I am not intending to return to Israel so I would rather dissolve my pension funds and “Gemel” and transfer the funds. Is that possible?
8.
jonnydegani | July 25, 2010 at 10:58 am
It really depends on what kind of funds you received and what is in your arrangement. I would recommend contacting the companies where you have you gemel and pension, explaining the situation to them, and asking them how to progress. Perhaps they’ll need some kind of paperwork to prove that you’re not a regular citizen taking her money too early, but an expat wanting to take her assets along.
Don’t give up if one call goes bad. If while speaking to one clerk, you hear in his voice that he is trying to shrug you off, just ask to speak to an advisor. If most call centers, they are not allowed to hang up on you, so the call will only end when you say so. Insist on speaking to an advisor, and if necessary, an advisor’s advisor, until you get a proper answer.
Good luck and please keep me posted on how it progresses so that I will be able to help the next person who asks a similar question.
9.
Reuven Dressler | August 30, 2010 at 5:32 pm
I was hoping that you could help me clarify one issue –
Pensions in Israel – “They are not taxed at all – not when you earn the money, and not when you withdraw it? They are essentially tax-free”.
That at least is my current understanding – do this jive with your understanding?
10.
jonnydegani | August 30, 2010 at 5:47 pm
Kind of. The money that you pay in (tagmulim) is taxed when you earn it, just like any income. The money your employer pays in is not taxed. Also, interest is not taxed and you are not taxed when you take out the money.
11.
Jo | September 19, 2010 at 7:10 am
Maybe you have mentioned this somewhere else, but is there any way to save privately for your pension? (I am an olah from Europe and this is very common there, for people who suspect their pension might not be big enough otherwise. I would like to do the same here, because better safe than sorry, you know? But I have no idea if it is even possible! If I could I would start with a very small amount 200-300 shekels a month maybe, but since I am pretty young it should still add up)
Is the only way to do this to save in a regular savings account or are there more profitable ways for pensions specifically?
12.
jonnydegani | October 4, 2010 at 1:22 pm
I am not sure. The best thing you could do is to contact a couple of the pension companies and ask them what they can offer you as a private citizen. Then, compare the offers they give you based on the usual investment guidelines, as well as the tax status each financial product can provide.
Please post back when you find out what is being offered. It would be a great source of insight for other readers as well.
13.
Anatol | October 4, 2010 at 11:09 am
I worked – as Israeli citizen – 1968 – 1971 in two Israeli companies: 1st in Haifa, 2nd in Tel Aviv. I assume I have paid some sum for the elderly pension someplace. Since 1972 I live in Germany and I am approaching my pension age. I wonder if I get something from the Israeli pension system. How does it work? where do I start?
14.
jonnydegani | October 4, 2010 at 1:18 pm
The first step I would take is to contact the pension provider that you paid into and ask them about it. If they give you money, great; if not, try contacting a lawyer in Israel find out if under the terms of your pension you are entitled to this money.
15.
Anatol | October 4, 2010 at 1:37 pm
I have no idea, where (if at all) the money went to. I do not even know, if the employer still exist. Is there any central office to ask the question there? In Germany there is one state institution (and many private), where the pension money goes to.
16.
jonnydegani | October 5, 2010 at 12:44 pm
I would first try to find out if your former employer exists. If not, you can try the Ministry of Trade, Industry & Labor, but I’ve never heard of them looking into something like this…
17.
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[...] unsure how to go about this, please see Shomer Shekalim’s series on the Israeli pension system: Part One: what you pay in, Part Two: types of pensions, Part Three: what comprises a pension fund, & Part Four: how [...]
18.
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[...] to Israel law, at least 5% of worker’s pay is set aside for retirement, rising to 15% by 2013 (see the previous post about pensions). The good news is that if this is true, then Israelis will have most of their retirements taken [...]
19.
withdrawing your pension early « Shomer Shekalim – ₪ | December 6, 2011 at 3:39 pm
[...] As I mentioned in part one in my series about pensions, there are three parts to a pension fund: (1) the part that you pay in, (2) the part that your employer pays in & (3) the part that your employer pays in that is set aside for severance. [...]
20.
Jeff | January 19, 2012 at 10:44 am
Can an employee contribute more than than the 5.5% from their salary (as required by law by 2014) into their pension scheme? Is there a cap?
21.
jonnydegani | January 19, 2012 at 2:50 pm
My gut tells me “no” because we are talking about the ability to grow money tax free, something the government doesn’t normally just give out. I would advise you to call you pension broker and ask under what circumstances you can give more (perhaps there is a certain sum, maybe you can give more when you are lacking hours at work and got paid less, you can contribute the missing amount etc.)
22.
how the Israeli pension system works part 5 – choosing the pension fund that’s right for you « Shomer Shekalim – ₪ | May 1, 2012 at 8:04 pm
[...] almost there. You already know what you’re paying into the system, you know how it works, you know what’s in the funds, and you even know how to compare [...]