Don't Neglect Your Pension Contributions!

Don't neglect your pension contributions!

In Israel, 12% of the active population consists of self-employed workers. This includes tradespeople, merchants and those practising liberal professions.

Burdened by all kinds of charges (Bituah Leumi, taxes and VAT), until 31 December 2016 most self-employed workers did not open a pension account with an insurance company. Such an account would have guaranteed a decent income when the time came.

The pension system in Israel: a hybrid model It should be noted that, as is the case with the healthcare system, in Israel the existing arrangement sits halfway between what exists in France and the United States. The Bituah Leumi pays an old-age allowance when the person reaches retirement age (64 for women and 67 for men). Private insurance companies, the well-known pension funds, then take over.

Many retirees find themselves in poverty if they have not taken out a private pension policy in time. The old-age allowance from Bituah Leumi is only 3,200 shekels for a single person and 5,100 shekels for a couple. That is why, in our daily lives, we see many elderly people still working, often as security guards or drivers for men and cleaning staff for women.

The 2017 law: a compulsory contribution for the self-employed To address this phenomenon, in 2015 Member of Knesset Elie Cohen from the then-party "Koulanou", under the leadership of Mr Moshe Kahlon, had a new law passed. This law, which came into force on 1 January 2017, now obliges self-employed workers to contribute to their pension. Any person over the age of 21 is now required to contribute, otherwise they will be fined 500 shekels for each year without contributions.

Unlike employees who contribute 18.5% of their gross salary, of which 12.5% is the employer's share, the rates for the self-employed are lower. But concretely, what is the contribution rate?

Calculating contributions for the self-employed

To calculate this rate, the legislator took as a ceiling the national average Israeli salary on 1 January 2017, namely 9,543 shekels per month.

First case : if the person earns a monthly income below the average salary, the monthly contribution is 4.45% on half of 9,543, i.e. 4,772 shekels, and 12.55% on the difference between that amount and the actual income.

For example, a self-employed person earning 7,500 shekels will be roughly in balance. They will save approximately 510 shekels in Bituah Leumi contributions and, in parallel, will pay a contribution of 555 shekels towards their pension with an insurance company.

Second case : the person earns a monthly income equal to or above the average Israeli salary of 9,543 shekels. The contribution amount remains the same up to 4,772 shekels. This represents 4.45% of 4,772 shekels (213 shekels) + 12.55% on the difference between half the average income and the actual income (9,543 shekels), i.e. 599 shekels. The total monthly contribution is therefore 812 shekels per month.

A self-employed person earning 10,000 shekels per month will save approximately 170 shekels in Bituah Leumi payments and will pay 812 shekels in parallel towards their pension with an insurance company.

A self-employed person earning 15,000 shekels will save 80 shekels with Bituah Leumi and will pay 812 shekels towards their pension.

A self-employed person earning 20,000 shekels will continue to pay their monthly contributions as usual but will additionally pay 812 shekels per month towards their pension.

Tax deductions and benefits

It is important to note that these payments are fully recognised by the Treasury. This means they are tax-deductible. This explains why, well before this law, many self-employed workers voluntarily contributed substantial amounts. In doing so, they secure a comfortable retirement on the one hand and, on the other, significantly reduce their taxes, with 35% of pension contribution amounts being deductible.

For any further information, please contact me directly at 054 307 0916 or by filling in the form below.

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