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There are two main types of pension funds available in the Israeli insurance market — keren pensiah and bituach menahalim policies. Over time, they have become much more similar to each other, but there are still some significant differences between them:
Salaried employment
A keren pensiah (pension plan) is a collective agreement between all members of the pension fund (i.e., anyone who opens up an account with the pension fund) and the company running the fund. The fund provides money management and insurance services to all the members of the fund and estimates what future benefits will be. It does not guarantee future benefits that may change, for instance, as the fund’s financial strength (or pay solvency) changes or as life expectancy grows. A keren pensiah is generally cheaper administratively than a bituach menahalim policy and includes some disability and life insurance (paid out as a pension to the surviving spouse and children) built into the policy. However, disability insurance is provided with a more limited definition, which pays out only if a person cannot work at any occupation at all, not just in his original field.
Bituach menahalim (management insurance) policies, in contrast, are personalized contracts between the employee and the insurance company, guaranteeing you future benefits based on the agreed-upon contract. They tend to be more expensive administratively but give you more flexibility to decide whether or not to include life insurance and disability insurance. There have been changes affecting bituach menahalim policies in the last few years. The most significant change is the elimination of a fixed retirement estimate for determining one’s pension. In older policies prior to 2014, there was a fixed estimate of months the retiree was estimated to live in retirement which determined the level of the pension paid by the insurance company. This fixed rate left the insurance companies exposed if longevity continued to grow, as they would need to pay pensions for more years.
The fixed estimate in bituach menahalim was thus eliminated so that bituach menahalim policies are now more similar to kranot pensiah.
Understanding the differences and your available options will help you be better equipped to choose a policy that suits your needs. For example, if you have life insurance or disability insurance in your home country that is cheaper than policies available in Israel, and you want a policy that does not include either of these components, it makes sense to consider a bituach menahalim policy. However, be mindful of the costs as bituach menahalim policies are generally more expensive than kranot pensiah.
Whatever your individual situation is, proper financial planning will help you ensure that your investment choices are appropriate for your stage in life and risk preferences. Some Israeli pension funds will alter the composition of their assets as an individual ages by reducing the more risky investments as one grows closer to retirement. With other policies, changing investment risk is left to the individual member to alter to meet his or her changing needs and thus you need to be following how your money is invested over the years and make appropriate changes.
The greatest benefit to employees currently available in Israel is called the keren hishtalmut (advanced training or sabbatical) fund. It originates from the Jewish tradition of shemittah, allowing the land to lay fallow in the seventh year. Keren hishtalmut contributions are made for six years and then, from the beginning of the seventh year onwards, the money accumulated in the fund is available tax-free to the employee (for contributions made on salaries less than NIS 15,700 bruto monthly). Maximum contributions to a keren hishtalmut are 7.5% of the bruto salary from the employer and 2.5% from the employee. This is 10% of one’s salary, prior to paying any taxes, contributed monthly, and invested over the life of the fund. It can be taken out tax-free in Israel after the sixth year, or can remain in the fund and continue to accrue gains that are tax-free in Israel for as long as you keep your account open. Once funds are taken out of the account, no new contributions can be made (new payments will need to be contributed to a new keren hishtalmut), but money in the account can continue to be invested, and all gains are tax-free.
| Keren pensiah | Bituach menahalim | |
|---|---|---|
| Life insurance | Paid as a pension to survivors – a minimum amount is required | Purchased independently in the policy - no minimum required |
| Legal structure | Collective agreement | Personal contract |
| Cost | Lower management fees | Higher management fees |
| Disability | Limited definition of disability | More inclusive definition of disability |
| Pension | Guaranteed minimum pension amount from day 1 | Pension based on savings – no guaranteed minimum pension |
| Payout after death | To survivors (spouse, children and parents) | To beneficiaries (can be anyone chosen by the policy owner) |
| Investment | With flexibility to change | With flexibility to change |
The tax-free nature of these accounts and their investing options and flexibility makes them the best investment and savings plan available in Israel. These funds should be the last savings plan accessed if you need cash flow, as their tax-free nature is a tremendous advantage vis-à-vis standard investment accounts. Depending on your home country’s tax regime, keren hishtalmut funds may be taxable abroad. There are differences of opinion among US tax professionals as to how to report keren hishtalmut funds, so check with your accountant or tax professional to ensure you are reporting them correctly.
Familiarize yourself with the extras in a salary package. When negotiating your salary, be aware of the many benefits that are often added to the base salary and those payments that are being made into savings plans for your long-term benefit. These sums substantially increase your income.
Research the two pension plan options — keren pensiah and bituach menahalim — by speaking with an insurance agent and/or a financial planner to ascertain which will be more to your benefit before signing on the dotted line.
Self-employed workers: research the options for structuring your income and consult as necessary with your accountant to choose the structure that works best for you.
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