Withdrawing Pension Funds

Pension money is the most tightly locked money you have — and that is deliberate. Any withdrawal outside the rules is treated as an "improper withdrawal" and taxed at 35% or your marginal rate, whichever is higher. There are, however, legitimate routes carrying reduced tax or full exemption.

Withdrawal before retirement age is usually irreversible and carries heavy tax consequences. Taking advice beforehand is strongly recommended.

When withdrawal is permitted

At retirement age

67 for men, and rising gradually to 65 for women. At this point the funds are intended to provide a monthly pension and benefit from significant tax relief.

Before retirement age

The default is a charge of improper withdrawal tax. Circumstances allowing relief or exemption do exist — low income, medical condition, or money deposited before 2000 — and are handled through the assessing officer (pakid shuma), with approval obtained in advance.

Withdrawal without ending employment

The default position is that contribution funds are locked for annuity purposes. This must be verified with your specific fund and with the assessing officer.

Tax-free withdrawal — the low income route

The best known route is intended for those on low income. Monthly income must fall below a threshold, which is low for an individual and higher for someone with children under 18. The withdrawal is capped in amount, and advance approval from the assessing officer is required.

The process runs in order: check eligibility, gather documents, complete the form for the assessing officer, and once approval is granted, approach the fund.

At retirement — annuity or lump sum?

An annuity provides certain income for life, tax relief and stability. A lump sum, through commuting the portion above the qualifying pension threshold, suits an immediate liquidity need or a genuinely superior investment alternative — but it means giving up guaranteed income, and it demands an individual calculation rather than a rule of thumb.

Tax on pension withdrawal

The 35% rate applies to contribution funds deposited from 1 January 2000 that are withdrawn improperly — 35% or the marginal rate, whichever is higher.

If excess tax was withheld, a refund claim can be filed. It is worth checking up to six years back.

What happens to severance pay

The severance component behaves differently from contributions. On ending employment you can withdraw it, usually exempt up to a ceiling but at the cost of both accumulation and future tax relief; leave it in the fund; or elect severance continuity (retzef pitzuim).

Withdrawing severance generally reduces your future pension, and the effect is larger than most people expect because the money would have compounded until retirement.

Withdrawal forms by provider

Each institution — Harel, Clal, Migdal, Menora Mivtachim, Phoenix — has its own forms and personal account area. The principle is identical everywhere: an application, identifying documents, and approval from the assessing officer where required.