What You Should Know About Israeli Employer Contributed Savings

Each new employer I've had in Israel has come with a new pension agent, whose advice I've followed. It wasn't bad. It also wasn't as good as it could have been.

To optimize my savings, I did a lot of research this time around. I discovered how much I didn't know about retirement savings and disability insurance in Israel.

Here's what I've learned.

The Short

The typical retirement and education funds (??? ???????) are managed funds with service fees, investing in low, medium, or high risk investments. That service fee is a percent of your money deposited and the interest earned and it adds up.

Long term, passive indexes (with less fees) have outperformed managed funds - meaning we all pay a lot for managed funds and they might not earn the most money (talk to an investment expert for more on this).

Retirement funds also cover disability income insurance and survivors pension. The coverage and fees vary for that too. We need to know what's covered and optimize for the right coverage fit.

The Long: Retirement Funds

This is relevant for employees with Seif 14 of the Severance Pay Law, which many white collar workers have.

20.83% of our total monthly earnings go to retirement.

• 8.33% is for severance (???????) - contributed by the employer (above your salary).
• 12.5% is for retirement savings on your salary (???????) contributed by both you (from your salary) and your employer (above your salary).

Basic Pension (????? ?????)

This managed fund includes disability income insurance and survivors pension insurance - covering income if you can't work, or paying close relatives a monthly amount after death. If someone doesn't want this (and does not have a partner/children), they can opt out and save money. Tell your pension fund every 2 years or you'll be auto-opted in. Terms vary, and the default isn't suitable for everyone. The insurance coverage is only on the 12.5% savings on earnings (???????).

Basic pension has 2 ceilings:

• The maximum you can deposit, currently 4,326/month.
• The maximum salary they'll insure, currently 31,000/month (3,875 deposited).

Everything above the ceiling, earnings on salaries over 20,765/month, has to go somewhere else.

Example:

A 30,000/month earner gets 6,300 shekels a month for retirement. Maximizing basic pension, 4,300 gets deposited into basic pension. There is an extra 2,000.

There are 3 options after basic pension - all 3 can be managed through an agent or directly with the fund.

1. Managers Insurance (????? ??????)

This is more expensive (a range of 1.5%-3% deposit fees is normal) than pension funds. The yields will be similar between pension and managers insurance if you chose similar investment tracks. It pays for 2 extra advantages.

• The disability pay coverage (on what you deposit in this fund) is more comprehensive- it will cover you if you can't work specifically in your field, and it will not subtract anything you get from National Insurance (????? ?????) from their payments. This is called ????? ???? ?????.
• The fund amount is guaranteed at all times, and never goes into "minus." Meaning, for the insured, there are never any surprise fees.

The coefficient, which (very simply put) is used to determine monthly payout in retirement age (against average lifespan of your gender and generation), used to be guaranteed upon opening this kind of policy. This changed in 2013, and can now change throughout life - the higher the coefficient, the lower the monthly payout during retirement. Coefficients have gone up as lives have gotten longer.

Some feel that managers insurance is too expensive for its value, but that pension agents encourage these plans because they make more money for the pension funds. However, older managers insurance plans (with a guaranteed coefficient) are often good deals.

2. Complimentary Pension (????? ??????)

This works just like a basic pension and is not as expensive as managers insurance (a range of around 1% on deposits is normal).

The fund amount is one big pot for everyone who contributes, so it's possible to be charged additional fees if many people withdraw funds or file insurance claims at the same time.

The disability coverage isn't as comprehensive and does not cover your specific profession, and will subtract any National Insurance (????? ?????) payments from what you're paid in a claim. Consider if there is such a circumstance in your field.

Example:

A surgeon (or pianist) may prefer disability pay insurance from a managers insurance policy, as it will pay out if there's been permanent damage to their hands.

3. Provident funds (????? ???)

This is the most complex option, but also possibly the most fruitful. It's not mentioned often by pension agents, as it takes them out of the picture. It's less common - done mostly by the very financially savvy and high-income earners. We all have the opportunity to be both financially savvy and high income earners.

• Invest in a managed provident fund you know and like (there are thousands).
• Get a new product (to Israel): an IRA. Buy whatever funds/stocks you want and it's self managed. Fees are around 0.2-0.25%, and requires a 200,000 deposit to open the fund.

Provident funds don't come with disability pay insurance.

Example:

A 30,000/month earner deposits 4,300 into basic pension and another 2,000 into provident funds. By default, the 6,300 gets split between the two options and each of the two funds gets both deposits based on earnings (???????) and severance (???????).

Because 60% is deposits based on salary (???????), and 40% are severance (???????), only 2,580 of the deposit into basic pension is used to calculate disability coverage with. It assumes it's 12.5% of the salary so insurance covers a salary of 20,000 - the maximum allowed in basic pension.

The remaining 2,000 go into the provident fund. Of that, 60% (1,200) is deposits based on salary (???????). That portion is not covered by any disability insurance.

But there's a hack to get that coverage.

You can ask to deposit ONLY your deposits based on salary (???????) into the basic pension and your severance (???????) only into the providence fund.

3,800 would be deposited to basic pension - 100% of these are deposits based on salary (???????). This means you're covered for your entire salary by the basic pension insurance. 2,500 (of only severance (???????) which aren't covered by disability pay insurance) go into your providence fund (which has no disability insurance).

The Long: Education Funds

Employer and employee contribute to this - the basic details are easy to search for online. The fund opens every 6 years (or 3, if you are over retirement age).

Many employers only pay education funds (??? ???????) up to the tax-exempt limit, incomes of about 16,000/month. Some employers pay into this fund based on your entire salary, not only up to the tax-exempt limit. If someone wants this benefit only to the tax-exempt limit (increasing monthly net take-home pay), they will not receive the money the employer would have contributed on the rest of the salary (decreasing the total compensation received). Interest earned on contributions above the tax-exempt limit is taxed when money is taken out of the fund, while the deposits above the limit are taxed monthly in your pay slip.

As with retirement funds, the typical education fund (??? ???????) is a managed investment fund with options for low/medium/high risk investment tracks. They do not have any insurance component, but can be used as collateral for low-interest bank loan, which can often be a better use of the money than removing it, because empty funds do not earn interest.

Because many experts believe passive index funds have better long-term success, 2 new options are becoming popular.

1. Managed funds that follow the S&P 500 (an index of the largest 500 US publicly traded companies). There are currently 5 on the market - Hellman Aldobi, Meitav Dash, Clal, Phoenix/Excellence, and Mor.
2. An IRA Education Fund, which is self managed and has lower fees than the managed funds. This requires a 200,000 deposit to open. It's similar to the IRA provident funds, and run by the same investment houses.

The Last Thing

Learn a little about compound interest, and what a huge difference it makes to long-term earnings. The sooner we understand our retirement and savings funds, the greater the payoff. For US citizens, according to my CPA, all of options I've mentioned are considered employer-contributed, and therefore exempt from taxes on passive foreign earned income. Check with your own accountant as of course they may advise differently (about provident funds and IRAs especially).

Often, pension/insurance agents will work with several investment houses, but not others. This does not mean those others, or non-agent options like the IRAs are bad options (often, they're better options), it just means more legwork to get them set up. Look up individual funds when agents recommend them. Ask about the kind of insurance and the kinds of funds you want to invest in.

It's your money.