how the Israeli pension system works part 2 – types of pensions
February 25, 2010 at 1:38 pm 19 comments
Until the mid 90′s, Israeli pension plans were defined benefits (DB) plans, where one would pay into the pension plan based on his or her salary, and would receive an annuity (monthly amount received) upon retirement as well as a certain level of insurance. The annuity is decided based on a number of factors such as (1) your age when you started paying into the fund (2) how many years you worked (3) your last salary (or in some cases, your average salary) (4) how long you are expected to live (they use actuaries, although it wouldn’t shock me if some use black magic) and other factors. Back then it was easy to choose a pension; one would compare the benefits of the plans and pick the one he or she felt best suited his or her needs.
In the mid 90′s the investment companies complained to the Israeli government about having to take responsibility for their investing and successfully lobbied for a defined contributions (DC) system, a system where the annuity one gets upon retirement is based on how much money is in the fund. Okay, now in English. The money I deposit into my pension fund is invested for me. When I begin to retire, the pension fund manager looks at how much is in my fund and based on that (and a few other factors) decides how much I get as an annuity (if you’re wondering, you can get some as a lump sum, but that just affects the amount you’ll get for an annuity afterwards.)
On one hand, this new system means that the worker can now cash in on the money that is earned by his or her fund; in the previous system the fund managers got to keep all the extra for themselves. On the other hand, this new system pushes the risk of retirement away from the pension funds and insurance companies and onto the worker, who in the overwhelming majority of cases does not understand all the issues of investing. So now, not only does every Israeli worker have to choose a pension based on his or her insurance and retirement needs, but one also has to make sure that the money is really being invested wisely.
This incredible responsibility make it imperative that every single Israeli be educated about this crazy system and learn the basics of investing required for the common citizen to keep track of his or her money. The aim of this series is to assist in such education.
To begin, there are two types of defined contributions (DC) pension funds, חדשות and כלליות (just to confuse you more, sometimes כלליות are called חדשות כלליות). The difference between these two pension funds is that the חדשות are allowed to include government subsidized savings bonds and include a certain level of life insurance and disability insurance.
So then why would anybody want the כלליות if the חדשות are available? The answer is obvious; no one would. The only people who usually invest in כלליות are those who make a bit less than twice the average wage money, as the limit for how much one can invest in a חדשות is 20.5% of twice the average wage. Workers who make beyond this amount typically invest as much as they are allowed to by law into the חדשות and then, with whatever money they have leftover to still use for a pension, pay into the כלליות funds.
In the coming posts I will focus on the חדשות funds, because frankly, I’m not rich and I only care about the funds that will affect the average person. Nonetheless, most of the stuff I post about will be applicable to all of the funds.
In Part 3, I will discuss what is contained in your pension fund. Stay tuned…
Entry filed under: pensions, Pensions & Everyday Investments. Tags: .
1.
Avi S. | February 25, 2010 at 8:05 pm
just wanted to thank you for all the great info on this blog. As an oleh about to start my first job here this has been extremely helpful. Keep up the great work!
Thanks
2.
israelihoosier | March 3, 2010 at 8:15 pm
I think some of this stuff is a little beyond me because I’m so young (only 26). I just got my first job here in Israel and I love reading your blog. You should post more often.
I’d love to hear your thoughts on grocery shopping…I live next to the Carmel Market in Tel-Aviv and we shop there regularly but because my fridge is so small, I’m having all kinds of problems finding places to cut back on my grocery budget. Maybe you could write a blog about this? I’d love to hear your thoughts.
Great blog! Keep on writing!
3.
Baila | March 4, 2010 at 3:35 pm
I agree with Avi. I find this blog extremely practical and informative. Regarding pensions, would you have information for those of us who made aliyah a bit later (40+), and perhaps include it in a post sometime?
Thanks.
4.
jonnydegani | March 5, 2010 at 7:05 am
Thanks for the kind words. I’ll try to put up something for Olim 40+ within the next couple of weeks. Thanks again and Shabbat Shalom.
5.
MARTA ALTSCHULER | April 2, 2010 at 10:39 pm
ME HAN NOTIFICADO QUE TENGO APORTADO POR MIS AÑOS DE TRABAJO EN ISRAEL (EL ULTIMO APORTE FUE EN EL AÑO 1980) COMO MAESTRA QUE HAY UN TOTAL DE 17.000 SHEQUEL, ESTOY VIVIENDO FUERA DE ISRAEL. COMO PUEDO RECIBIR ESE IMPORTE??
6.
jonnydegani | April 3, 2010 at 10:02 pm
sorry, my Spanish is not so great. Please send me your question in English and I will try to answer your question
7.
components of a financial plan « Shomer Shekalim – ₪ | March 9, 2011 at 9:05 am
[...] 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 to choose a [...]
8.
linda bloom | May 10, 2011 at 7:50 pm
I lived in Israel for over 30 years and worked for all of that time. I now live in Spain and am coming up to pension age and have been told I can only receive an Israeli pension if I live in Israel. This doesn’t seem right. Has anyone got any information on this?
9.
jonnydegani | June 5, 2011 at 11:15 am
as far as I know, you receive your pension no matter where you live. What company controls your pension? What years was it invested?
10.
dorel | June 23, 2011 at 7:36 am
hello, I could use some advice. I left Israel in 1993 and established myself in Australia permanently. I only worked in Israel for around 4 years. What should I do to retrieve the funds accumulated into my pension fund? I do not have any records of the name of the fund. All I have is my old teudah zehut and passport.
any suggestions
11.
jonnydegani | June 23, 2011 at 7:54 am
There are only about 15 companies that handle pensions. I would call up each one and ask if you have a pension there.
12.
jane prezma | April 8, 2012 at 6:17 am
Hi Dorel, Would be interested if you managed any headway with receiving funds from Israel once you moved to Australia.
13.
how the Israeli pension system works part 1 – what you pay in « Shomer Shekalim – ₪ | August 8, 2011 at 9:32 pm
[...] In Part 2, I will discuss the different types of pension funds (קרנות פנסיה) in Israel. Stay tuned… [...]
14.
Ofer | January 30, 2012 at 11:21 pm
Hi
I have 2 small corrections for you :
A) DC funds were introduced in 1992. in 1995 the DB funds were closed to new members
B) The annuity of DB plans vary between different funds.
Hope this helps
15.
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 returns and fees. This post [...]
16.
janet | October 5, 2012 at 6:17 pm
Hi, I was wondering, I’m living in the state for many years. How can I collect my pension from Israel? Thank you
17.
jonnydegani | October 22, 2012 at 3:35 pm
contact your pension company and ask
18.
Lynn Chasan | April 15, 2013 at 1:09 am
Hi. I would like to live in israel – I am 58 and wonderd if I could pay into the Pension or Insurance scheme so that when I stop working in a few years I can claim a pension and pensioners benefits.
thank you
19.
jonnydegani | April 21, 2013 at 2:37 pm
You can of course pay in, but your pension will only grow for as much time as you work until you retire. It is a defined contributions system – you can only get back based on what you put in and how ti grows.