Understanding the Retirement System in Israel

Understanding the retirement system in Israel Following the many calls from French-speaking individuals wishing to open a pension account through my husband, Nissim Bitton, an insurance broker for many years, I noticed that French-speaking olim were unfamiliar with the Israeli retirement system. It is therefore necessary to provide them with detailed explanations.

The predominant role of insurance companies

In Israel, insurance companies play a predominant role, far more important than that of banks. This is why Israeli insurance companies are so highly rated for their financial solidity at the international level, even during the Covid-19 period. These companies compensate, for a fee, for the limited means of Israeli national institutions in terms of social benefits and the deficiencies of the public health system. They manage savings plans, quality health coverage, benefits in the event of serious illness or accident, compensation in the event of temporary inability to work, and of course, pensions.

Unlike France, pension contributions in Israel are not pooled but capitalised. Each amount paid into the employee's or self-employed worker's account constitutes a personal nest egg. This sum will allow them, once retired, to receive a monthly lifetime allowance. In the event of death, this allowance will be transferred monthly to their legal heirs for 20 years from the date of the deceased's retirement.

For employees Since 2008, legislation requires that six months after being hired, the employer pays 18.5% of the gross salary into their pension account. Six percent of this percentage is borne by the employee. This percentage is made up of two parts: 12.5% for retirement and 6% for severance pay.

In the event of the employee's departure, the insurance company pays the severance pay. If the employee is dismissed, the employer must top up the severance pay to the equivalent of one month's salary per year. However, the employer must open a pension account for the employee and pay contributions regularly. And it is on these two points that problems often arise.

After drawing the attention of employees on Facebook, I received more than a hundred calls in two days. The situation is alarming: only two of them actually had an open pension account. For the others, the deduction of the employee's share appeared on their payslip, but no amount had been paid to an insurance company. Even for the two employees who had an account, the employer of one of them was not making payments regularly.

Checking your pension account

How can an employee check whether they have an account and whether amounts are being paid correctly?

First of all, only an insurer holding a licence in financial products and retirement issued by the Ministry of Finance can open a pension account for an employee. Until 2016, the employee had no possibility of choosing their insurer. Today, the employee can choose the insurer they wish to work with, provided that the insurer holds a licence to practise in life insurance. An insurer who handles car and home insurance is not necessarily authorised to provide pension insurance.

The first point that may alert an employee regarding the opening of their pension account is whether or not they have met a specialised insurer. Indeed, the amounts deposited will systematically be invested by insurance companies in various projects. To do this, the employee must specify whether they prefer a more conservative circuit or a more dynamic one with higher rates of return but riskier investments.

It is imperative to explain to the employee, in their mother tongue, all the ins and outs of the pension contract they are about to sign. My husband, an insurer for 25 years, very often opens a pension account with a "Cacher LaMéhadrin" circuit, which means that all investments made with the amounts paid comply with the requirements of Halacha and are generally safer.

The broker who insures the employee must then verify each month that the payments have been made correctly by the employer. Hence the importance of having an honest and serious insurer to advise the employee in time in the event of a problem.

Each year in April, insurance companies send each of their policyholders directly a statement of payments made to the pension account.

In the event of the employee leaving the company, the employee will receive from the insurance company the amount of severance pay to which they are entitled, i.e. one month's salary for each year worked, without tax deduction. However, they will not be able to receive the amounts paid for the retirement portion before the legal retirement age.

However, if they wish to recover all the amounts paid, they will have to deduct 35% of the retirement sum for taxes. The legislator's objective is to discourage people from withdrawing their retirement savings. It is important to know that the "Severance Pay" portion of the pension account forms an integral part of the calculation of the retirement allowance. If the employee has already withdrawn their severance pay, their monthly allowance will be significantly impacted.

For self-employed workers

Since 1 January 2018, pension contributions have become mandatory for liberal professionals, tradespeople or craftspeople aged between 21 and 60, on pain of heavy tax penalties. The state wishes to avoid people reaching retirement age falling into poverty. The "old age" allowance paid by the Bituach Leumi when a person stops working is so negligible that many can no longer live decently and must work in small jobs to survive.

To avoid these dramatic situations, the Knesset passed a law in 2018 requiring self-employed workers to contribute to their pension. The money they pay into their pension account will be paid to them monthly once they retire. In the event of a physical inability to continue their activity, the insurance company will pay their contributions until the legal retirement age.

The minimum mandatory contributions for self-employed workers are divided into three groups. For a person declaring to the tax authorities half the average Israeli salary, i.e. 4,836 shekels, they must contribute 4.45%, meaning a minimum of 210 shekels per month. For those who earn a higher income, they must contribute 12.5% of their income. Finally, for those who earn more than 9,673 shekels, the minimum contribution is 825 shekels and above, if they wish.

As these amounts are deductible from taxable income, many self-employed workers contribute more than the minimum required by law. This allows them to pay less tax and build up a more comfortable retirement.

Once again, only an insurer authorised by the Ministry of Finance can open a pension account. Whatever your situation, employee or self-employed, it is imperative to call on an experienced and rigorous insurer to make the right financial choices and benefit from quality follow-up.

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

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