Pension

The pension system is one of the cornerstones of financial security in Israel. Since 2008, every employer has been legally required to contribute to a pension plan for their employees, making pension savings a central pillar of financial life for every worker and freelancer. Despite this, many people lack a clear understanding of how their money is managed, what distinguishes one fund from another, and how much they actually pay in management fees.

Understanding how pensions work in Israel is a critical first step toward sound financial planning. The decisions you make today about your fund, investment track, and management fees will directly impact your quality of life in retirement.

Types of Pension Funds

Israel has two main pension products: comprehensive pension funds and managers insurance. Comprehensive pension funds are the most common, offering disability and death coverage alongside retirement savings. Managers insurance, run by insurance companies, provides greater flexibility in choosing investment tracks and insurance coverage but tends to carry higher costs.

The key difference lies in the cost structure. Comprehensive pension funds have relatively low management fees with built-in insurance coverage, while managers insurance separates the savings and insurance components, allowing customization but potentially increasing the overall price.

Management Fees and Returns

Management fees are one of the most significant factors eroding pension savings over time. Pension funds charge two types of fees: a percentage of accumulated savings (up to 0.5%) and a percentage of monthly contributions (up to 6%). Even a half-percent difference in fees can amount to hundreds of thousands of shekels over decades of saving.

Comparing returns between funds is important but should be done carefully. Past performance does not guarantee future results, and you should evaluate performance over long periods rather than just the last year. The best formula combines low management fees with reasonable long-term returns.

Hishtalmut Fund (Keren Hishtalmut)

The Hishtalmut fund is one of the most attractive savings vehicles in Israel, primarily because of its capital gains tax exemption. After six years (three for educational purposes), you can withdraw the funds without paying any tax on profits up to a certain ceiling. This is a savings tool that every employee and freelancer should take advantage of.

Retirement Planning

Early retirement planning is the key to a comfortable retirement. The sooner you start saving, the more compound interest works in your favor. It is recommended to review your pension status regularly, verify that contributions are being made correctly, and consider voluntary additional contributions if your budget allows.

The retirement age in Israel is 67 for men and 65 for women (with a rising trend). It pays to prepare well in advance and build a retirement plan that ensures sufficient income in the years after you stop working.