Categories
Employment in Israel

How Do Pensions in Israel Work?

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.

Categories
Employment in Israel

Understanding Israeli Salaries

Whether you have lived in Israel for a number of years, are considering aliyah or are packing up to make the big move, one of your biggest concerns is surely how to make a good living in Israel. Stanley Fisher, former President of the Bank of Israel, famously remarked that he couldn’t understand his own salary slips. Salaries in Israel are made up of a number of components and understanding them is key to analyzing your financial situation. 

Let’s clarify some of the basic terms that are used to describe the required and optional tax and social benefit obligations in Israel. 

Ø  Bruto – Gross salary. Generally the base salary that is offered to you in a contract.

Ø  Neto – The amount of money actually deposited in your bank account on a monthly basis, after deductions of income tax and other required payments are removed. Note that the Israeli standard is to be paid monthly, not bi-weekly or bi-monthly.

Ø  Mas Hachnasa – Income tax. Incurred at a graduated rate. Income tax is removed automatically from your salary, and in most cases, there is no need to file taxes at the end of the year. Income taxes are calculated on an annual basis, yet paid out on a monthly scale. We will dissect this area in a later post.

Ø  Bituach Leumi – National Insurance coverage. Often compared to US Social Security benefits, but they are actually very different. (I’ll compare these two institutions in a future article.)

Ø  Keren Pentzia – Pension fund deposit. This is a mandatory benefit requiring the employer to pay a minimum of 6.5% of the monthly bruto total and the employee to deposit a minimum of 6% of bruto. Each employee has the ability to choose the investment option they prefer. This will also be the subject of a later post.

Ø  Kupat Gemel – Mutual fund investment. Similar to a pension fund in structure and purpose, but not mandatory.

Ø  Bituach Menahalim – Pension for managerial positions and above. 

Ø  Keren Hishtalmut – Translated as a “Study Fund.” The initial purpose was for an employee to accumulate a base in order to apply for continuing education. In reality, it now acts as an additional, optional short term tax free savings vehicle. Some employers offer this as an added benefit, but it is not available across the board.

Ø  Ovdan kosher avodah – Additional, optional long term disability insurance. This perk is generally only offered in the hi-tech sphere.

When you are offered a job in Israel, you will be told what the bruto salary is and what additional benefits (if any) are provided. An employer will not be able to tell you what your neto take home pay will be, since this is based on many factors outside his control. You can get an idea of what your neto salary will be by using this calculator.

Got any more questions about how your neto salary is determined? Comment below and I will respond.