Running your own business means juggling a lot of priorities, and retirement planning is usually not at the top of the list. Since 2017, though, pension savings are required by law, even if you’re self-employed. The upside is that pension contributions can make a real difference to your future income, lower your tax bill and even improve your cash flow right now.
Pension obligations for the self-employed
Self-employed individuals in Israel are required to set aside part of their income for pension savings by the end of the relevant tax year. The required amount is calculated based on taxable income after allowable deductions, but before pension or Keren Hishtalmut contributions.
The law sets minimum contribution rates that depend on income levels relative to the average annual wage in Israel. On income up to half of the average annual wage, which in 2026 is 82,614 NIS, the required contribution rate is 4.45 percent. On income above that level and up to the full average annual wage of 165,228 NIS, the required rate rises to 12.55 percent. Income above the average wage is exempt from mandatory contributions, although voluntary contributions are allowed and often advisable.
If you’re both self-employed and salaried
If you are self-employed and also work as a salaried employee, you are not automatically required to make full independent pension contributions. You only need to top up your pension savings if the total contributions made through your salaried job, including both employee and employer portions, are lower than what you are required to contribute based on your self-employed income. In that case, you are responsible for the difference.
Penalties for failing to contribute
Fines may be imposed on self-employed individuals whose annual income exceeds 74,972 NIS and who fail to make the required pension contributions. Before a fine is imposed, the fines collection authority sends a warning letter and allows 90 days to make up the missing contributions. Failure to do so results in a fine of 500 NIS, indexed annually.
What you gain from pension savings
A pension plan is not necessarily just a savings account for retirement. Part of it is designed to pay you a monthly income when you reach retirement age, but it can also include insurance coverage, such as protection if you become unable to work or if you pass away. In other words, pension contributions are not only about the future. They also help protect you and your family in the shorter term.
For those without salaried income, pension contributions unlock both tax deductions, which reduce taxable income, and tax credits, which reduce the tax owed. These benefits are claimed retroactively through the annual tax return, supported by documentation from the pension provider. Professional guidance from an accountant or pension advisor can help ensure the benefits are fully utilized.
Tax benefits on pension contributions
Pension contributions come with significant tax advantages. Self-employed individuals are eligible for tax benefits on contributions up to 16.5 percent of income, subject to the statutory income cap. These benefits apply not only to the mandatory minimum but also to voluntary contributions above it. Tax benefits are granted only in the year the funds are actually deposited (by the end of December).
Tax benefits can reach substantial amounts. Based on your income, these amounts can often reach more than 15,000 NIS tax returns a year.
Bituach Leumi and health insurance savings
Pension contributions can also reduce the income used to calculate Bituach Leumi (National Insurance) and health insurance payments. When contributions qualify for a tax deduction, they may reduce these payments by a combined rate of up to 17.83 percent of the recognized amount. This is a meaningful cash flow benefit that many business owners overlook.
Unemployment or business closure
In cases of unemployment or business closure, self-employed individuals who contributed as required may, under certain conditions, withdraw up to one third of qualifying contributions.
How to set up pension savings
- Open a pension account with an approved pension fund, insurance company or provident fund (Kupat Gemel).
- Choose the specific pension product and investment track that best suit your needs.
- Complete the required paperwork, including personal details and authorization to debit your bank account.
- Provide medical information if requested.
- Decide how and when to contribute, either through payments during the year or a single lump-sum deposit toward the end of the year once your income is clear.
- Make sure all contributions reach the pension provider before the end of the tax year.
Comparing pension funds
Choosing a pension fund is not a minor decision. Small differences in management fees, returns and insurance coverage can add up to substantial sums over time. Comparing funds allows you to identify the option that best fits your financial goals and risk tolerance.
Israel offers several types of pension funds, including comprehensive pension funds, general pension funds and designated funds. Each has its own structure, advantages and trade-offs.
Management fees, returns and insurance coverage
Management fees are one of the most critical factors to examine. Even modest differences can significantly erode long-term savings, and in some cases fees are negotiable.
Returns matter too, though they should be viewed carefully. Past performance can offer insight but never guarantees future results. Alongside fees and returns, it is essential to review the insurance coverage embedded in the pension product, particularly disability and survivors benefits.
Comprehensive or general pension funds
Comprehensive pension funds include built-in insurance coverage, while general pension funds focus primarily on investment returns. The better choice depends on your personal needs. Some business owners value broader insurance protection, while others prioritize maximizing savings and returns. Built-in insurance may be less important for someone reaching retirement age in the near future and more critical for someone younger with dependents.
Why to work with an insurance agent
Choosing a pension plan can be complicated. An insurance agent helps translate the rules and options into practical choices that fit your situation, rather than leaving you to guess based on generic information. Additionally, an agent who works regularly with pension providers knows what fees are realistic and can often secure better terms than someone approaching a fund on their own. It’s important to be aware, though, that many pension agents receive commissions from specific companies and are not entirely objective.
The agent should tailor fit these long term savings to your needs and preferences. For example, if you’re 58 and have a 10 million 401K fully funded, you will probably want to contribute less, or in a different aggressive track, than someone who is 29 with no savings at all.
Switching funds and ongoing management
If you already have a pension fund, it may still be worth considering a switch. Changes in fees, returns or personal circumstances can make another fund a better fit. Digital comparison tools now make it easy to review options and understand how funds stack up.
Choosing a pension fund is only the first step. Reviewing statements, monitoring performance and comparing options periodically helps ensure your pension savings continue working in your favor.
Pension planning for self-employed individuals is not just about meeting a legal requirement. It is a powerful tool for building long-term security, reducing taxes and strengthening your overall financial strategy.
This article is based on Kol Zchut (Hebrew), FNX (Hebrew), Shivat Zion and Grit Finances (Hebrew). Thank you to Motty Handler, registered insurance agent, hmotty@gmail.com, for his help in writing this article.
