Congrats! You are employed in Israel and either have been or will soon be paying into your pension.
By law, an employer must begin paying into his employee’s pension within 6 months of the beginning of employment. For those employees who already pay into their pension from their previous job, the employer must pay within 3 months retroactive to the first day of work, or before the end of the year, whichever is sooner.
While separating money for retirement is a legal requirement of the employer, choice of the fund to invest, the financial product and the company with whom it is invested is the choice of the employee (there is a slight exception with the pitzuyim money, but we’ll get to that later). If the employee does not choose a pension fund before the legal time by which the employer must pay into the pension, the employer may put the money in a fund of his or her choosing, although the employee still has the right to choose a pension fund later and move all the money to the fund of his or her choice.
It is important to stress that neither an employer nor the insurance agent with whom he or she works can force an employee to choose any specific financial product or pension fund. In the small amount of time I have worked in pension, I have encountered too many dishonest insurance agents who have lied to employers and employees telling them that all the employees must join a specific pension plan. If this is happening to you, please contact me and I’ll tell you how to respond and report the crime to the proper authorities.
The money paid into a pension is divided into three groups:
(1) the amount the worker invests (תגמולים paid by the עובד). This can be as much as 7%. A worker can request his employer to set aside more of his kind of תגמולים, which would be of no extra cost to the employer.
(2) the amount that the employer matches (תגמולים paid by the מעביד). the maximum amount that can be paid by the employer for this is 7.5%
(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). The minimum that can be paid monthly is 6% and the maximum is 8.33%.
As of July 2016, Israeli law demands that 18% of the base salary be deposited into the pension every month: 5.75% from the worker, 6.25% paid in by the employer and 6% again by the employer for pitzuyim. (Beginning 2017, it will be 6%, 6.5%, 6%).
The money put aside can be invested through (1) a keren pensia, (2) kuppat gemel or (3) bituach menahalim. In future posts, I’ll discuss the differences between these three items.
If the money is put aside into a bituach menahalim, the employer must pay up to 2.5% for the employer to receive coverage of 75% disability. This comes at the expense of the תגמולי מעביד, although the תגמולי מעביד cannot go down to less than 5%.
- For example, if a company normally offers a person 6.5% for תגמולי מעביד, then they can pay it as 1.5% disability and 5% תגמולי מעביד.
- If the disability costs more, let’s say 2.5%, then the employer can pay 2.5% disability and 5% תגמולי מעביד (which, is 7.5%).
- If disability costs more than 2.5%, the the employee must pay tax on the additional amount paid. Likewise if they total amount paid by the employer is more than 7.5% (ie, disability of 2.5% and additional תגמולי מעביד of 6%), then the employee must pay taxes on the additional 1.5%
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! Compound interest and tax deductions also mean that your pension will contain anywhere from 20% – 30% of all the money you receive from your job over your lifetime. Let that sink in, 20% to 30%. Choosing your pension will most likely be the most significant financial decision of your lifetime. And if that isn’t enough pressure, it also includes the lion’s share of your life and disability insurance.
This series will give you an overview of the pension system, enabling you to understand what it involved in your pension and how you can successfully choose and manage your pension.