Financial advisors will tell you that pensions are just as important as salaries, and for good reason. Although it seems counter-intuitive, retirement expenses are just as high if not higher than what you are spending now. This is because of new expenses such as medicine and medical treatments and increased spending on things like transportation and food. Taxis often replace driving, busing or walking and the ability to get to discount stores may be curtailed. Some retirees are still marrying off children or helping out their young adult kids. And basics like phones, electricity and home maintenance don’t change.
That’s why smart financial planning includes planning for retirement and luckily, the Israeli government has regulated this so that every citizen has some form of pension.
Bituach Leumi
All citizens who have contributed to Bituach Leumi for 12 years are eligible for a state pension. Israeli residents start paying into Bituach Leumi at the age of 18 (unless they are in the army or National Service). If you are working, this payment is deducted automatically from your paycheck. If you are a business owner, the government collects this payment from you directly. The basic pension starts at 1,558 NIS a month per person and 2,430 NIS for a couple, so while this is a nice amount to have, it’s not going to go very far in covering your living expenses. Furthermore, the amounts paid out by Bituach Leumi might be reduced due to actuarial issues.
Private Pensions
Your employer is obligated to set aside at least 6.5% of your salary or the average wage in the economy (whichever is lower) every month for pension insurance. You also pay into the insurance, at the rate of 6% of your salary.
Your employer is also obligated to set aside severance pay to the amount of 6%, or 8.33% if you have signed a Chapter 14 clause. A Chapter 14 clause states that the employee is entitled to receive exactly what is in the fund (no more and no less) at the time of termination, regardless of whether the parting of ways was initiated by the employee or the employer. If you don’t use your severance pay, it becomes part of the pension paid out to you in retirement.
Just like Bituach Leumi, employees have their pension deducted automatically from their paychecks, while business owners have to set this up on their own.
Multiple Pensions
Many companies choose a pension provider for their employees and this may result in one person having several pension plans. In recent years, the government has mandated that an employee can choose which plan he wants to contribute to, regardless of the company’s official provider. So if you get a new job but already have an existing plan, you can continue to contribute to it and don’t have to open a new one.
If you do have multiple pensions, check whether you are paying fees on each one. If that’s the case, you may be better off consolidating them into one, although there are cases where it makes sense to keep them separate. If you merge the plans, make sure that your pension is now being paid into the consolidated plan.
Catching Mistakes
It’s important to check that your pension is actually being deducted, because if a mistake is made you may find yourself suddenly losing most of your salary to a retroactive pension payment.
In general, we recommend looking at your payment stub (tlush maskoret) carefully each month, to check that everything is in order. Payroll mistakes can happen and if you’re only looking at the final number at the bottom, you may miss them.
How to Choose a Pension Plan
There are many pension providers and it can be extremely confusing to understand the differences between them. Revenues, management fees, level of investment aggression, annuity vs. lump sum payments, various insurances connected with the policies and more differences need to be taken into account when choosing a plan. To complicate matters further, insurance agents are often representatives of one specific company, so they aren’t giving you objective advice.
If you’re starting fresh or want to switch pension companies, it is advisable to consult with an independent insurance agent who can explain what your options are and recommend a plan that meets your needs.
Thank you to Motty Handler, registered insurance agent, hmotty@gmail.com, for his help in writing this article.