When you start your first job in Israel, the company is obligated to deposit funds into a pension plan once you have been there for 6 months. The minimum contribution is 18.5%, 6% of which is deducted from your salary and the rest is paid by your employer. This includes both pension and severance pay. Some contracts will have something called Seif 14, which raises the severance pay to 8.33%, paid for by the employer.
But what happens when you switch jobs?
Your new employer is obligated to deposit into your pension fund once you have been employed for three months or at the end of the calendar year, whichever one comes first. They must pay into your pension retroactively, from your first day of employment.
Most employers have a pension company that they work with and they may recommend that you switch to that company. However, you are under no obligation to do so and you can ask them to deposit into the plan you already have from your previous job.
The differences between pension plans are hard to understand on your own and it’s generally recommended that you consult with an insurance agent who specializes in pensions to determine whether you should switch or stay where you are. Be aware that many insurance agents are salespeople for a specific pension plan and are not objective professionals.
If you are keeping your previous plan, you must notify them that you are now working for a new employer. This can be done via your agent or directly by you. Next, provide your employer with the name of the plan and your account number. Always check that deposits are being made, since mistakes have been known to happen.
Employment gaps and your pension
Sometimes you don’t go directly from one job to the next. It may take you a while to find your next challenge, or maybe you decided to take a break from working for a little while for personal reasons or for an extended maternity leave. In these cases, it’s important to note that if there are no deposits into your pension plan for five months, you will lose two crucial elements of this insurance: coverage if you are unable to work for medical reasons and allowances paid to your family members in the event of your demise.
In order to avoid losing these aspects of your pension plan, let your pension company know that you aren’t working and sign a form called Hesder Bituach, which allows you to pay a nominal fee to keep your plan active. You can set up a standing order (Horaat Keva) to pay this or have the amount deducted automatically from your savings in the fund. It’s also possible to pay a higher amount and add to your actual pension amount (this is often called Risk Zmani, or temporary risk). However, in most cases it is best to pay only the minimum to keep the insurance going, so as not to change the coverage amounts.
In both cases, once you start a new job and that employer pays into your plan, you retain your seniority and the conditions you previously had.
If you decide to open a business instead of getting a new job, consult with a trusted insurance agent to get advice on how to best continue your pension plan.
Severance pay
Included in your pension plan are funds that are earmarked for severance pay and can be withdrawn if you are fired and, in some cases, if you quit your job. This might be a good idea in a financial emergency, but the ideal is to leave them in the pension fund, since, at retirement age, that money will be about 40% of your retirement pay.
Withdrawing severance before retirement has two disadvantages:
- It lowers the tax benefit when you retire by more than the amount you withdraw (for example, if you withdraw 100,000 ILS, the calculation is an added 35% + CPI (Madad HaMichirim LaTzarchan)
- The money you withdraw will stop gaining from investments, and the gains when retiring will be subject to your income tax bracket and not a flat 25% fee like on other capital gains tax (Mas Rivchei Hon)
It’s recommended to consult with an accountant or tax advisor before making a decision to withdraw severance pay.
If you are due severance pay, your employer will give you Form 161, in which you request one of three options:
- Withdrawal of severance
- Addition of the severance pay to your retirement fund
- Leaving it in the fund and maintaining the right to withdraw it in the future as severance pay
If for some reason you are not given the form, the pay will automatically be added to your retirement fund.
Learn more about your pension
Your pension is an important part of your financial portfolio, so it’s important to understand how it works and what you will be paid upon retirement. More information is available in our article, How Do Pensions in Israel Work?
Thank you to Motty Handler, registered insurance agent, hmotty@gmail.com, for his help in writing this article.