Keren Hishtalmut

Years ago, a keren hishtalmut was given as a benefit to an employee so that he or she could accumulate money in order to undergo training in his or her respective field (hishtalmut means “further study”).  Somehow, the learning part got thrown out and it became a benefit that helps Israelis save for the short term.  This is not a mandatory benefit, like a pension, but a optional one.  Usually, for those who receive it, the employee pays 2.5% of his base salary and the employer pays in 7.5% of the base salary, all of which is put into a fund which opens after 6 years.  Once it opens, you can either take the money or continue to let it grow tax free.

(Note: For teachers, the amounts to pay for the employer and employee are 4.2% and 8.4% respectively.  In most cases, the teachers have to use some of the money for an actual training course and only then they can pocket the rest).

First things first – if your employer offers you a keren hishtalmut, take it!  Your employer is generously matching your input 3:1; that means you’re already seeing a 300% return before anything is invested.  Even if you need to borrow in order to forgo the 2.5% of your salary, it is almost always worth it.

How to choose a Keren Hishtalmut:

Choosing a hishtalmut isn’t so different from choosing any other type of investment.  You have to consider four things:

1 – Your needs:  When do you need the money and what for?  Can you afford the additional risk of an aggressive investment or should you stick to a conservative one?

2 – Your feeling about risk:  How do you feel about risk?  Do you have a strong opinion about the current state and future of the market?

Based on these you can answer:

3 – Type of investment:  What kind of fund do you want?  Like pensions, there are general funds, aggressive funds (more stocks), conservative funds (more bonds) and funds based on Haredi Halacha.

4 – Fees:  Pensions can charge up to 2% annually for managing your assets.  If you’re part of a union or big business, odds are you may have a significant discount if you go with a specific fund.  From experience I can say that most companies will immediately drop the fee to 0.9% if you just ask (if a company is coming off a good year, they may insist on you paying more.  In my opinion this is complete BS because past results do in no way guarantee or even indicate future performance).

You can check the status of any Keren Hishtalmut via the government website that overlooks them, gemel net.  Click here to go to gemel net.  Click here for an explanation of how gemel net works.

Kuppat Gemel

There are three primary kinds of kuppot gemel:Until pensions became the norm, kuppot gemel were offered as a mutual fund held until retirement.  As I wrote in my previous series about pensions, this can be used in lieu of a keren pensia. 

Kuppat Gemel LeHashka’ah

Once upon a time, the Israel government wanted to provide people with an additional way to save for their pensions.  The solution was called tikun 190 or correction 190 to the tax code.  Tikkun 190 allows a person to deposit a certain amount (depending on age) and only withdraw after reaching age 60 (otherwise there is a fine).  The payout is an annuity, unless the person already gets an annuity above ~4,500 shekels (the amount rises slightly each year), in which case it can be a lump sum.  Finally, and most importantly, the amount deposited is tax deductible up to NIS 34,000 and payout is taxed 15% on the nominal interest.

While there was a logic to all the rules I laid out above, few people took the government up on the offer of potentially losing liquidity for a marginal tax break so the government made it easier and offered a kuppat gemel lehashka’ah – a kuppat gemel for investing. 

The rules are pretty simple:

1. A person can deposit NIS 70,000 of after tax money every year.
2. The money is always liquid (although if you take it out early, you pay capital gains of 25% on the real interest.  If you leave it in, you can lump it into other pension products for taxation purposes)

Most who look to invest extra money use the kuppat gemel lehashka’ah. In fact, I have yet to meet anyone using the tikkun 190, but I suppose that if the investor is above 60 already and will definitely get a pension of NIS 4,500, then it is the better option.

No matter which you choose – you can move between investment tracks just like a pensia, gemel, hishtalmut etc. so make sure to make your investment more solid as you approach retirement age.