Pension Plans

On January 1, 2008, a law went into effect requiring employers to provide pension plans for their employees and regulating their terms. Prior to the passing of this law, only about 50% of employers offered pension plans. Though Bituach Leumi (the National Insurance Institute) provides retirement benefits, the amount is generally not sufficient to cover the reasonable living expenses of retirees.

According to the new law, all employers must open a pension plan (Keren Pensia) for their employees after 6 months of employment. This applies to both full and part time employees but is not obligatory when employment is on a freelance (“atzmai”) basis. An employer is not obligated to provide retroactive pension plan contributions for the initial 6 months of employment.

This law is being instituted in stages. In the first stage, the minimum contribution by the employee is 1.66% of his gross (“bruto”) salary while the employer must contribute a total of 3.33%. The employee’s portion goes toward the pension plan exclusively. The employer’s 3.33% is broken down as: 1.66% toward the employee’s pension and 1.67% toward “pitzuim” (severance pay which, under Israeli law, an employee who is fired is entitled to receive at the rate of one month’s salary for each year that he worked.)

These calculations are based on an average monthly (gross) salary of 7800 NIS. If an employee earns less than that amount, the percentages remain the same. Some employers offer a perk to their employees and contribute higher percentages. By law, both employer and employee are allowed to contribute up to 5% of the gross monthly salary toward the pension plan and the employer can contribute up to 8.33% toward the severance pay (pitzuim). The pension law will eventually require both the employer and employee to contribute these amounts, though, as yet, no date has been esetablished.

The government also now regulates the actual investment, meaning the percentage of the investment that can be high risk is lowered by law as the employee gets closer to retirement age.

The pension fund covers three scenarios:

Pension: At retirement age, (67 for men, 65 for women) the individual will receive a monthly payment. In the past, the retiree was able to opt for a lump sum distribution rather than monthly payments, but the new law requires that payments be made monthly.
Disability (“Kitzvat Nechut”): Every pension fund allows for disability coverage, but the coverage only kicks in when it is determined by a physician that the employee is at least 75% disabled and has been unable to work for at least 90 days. And, the amount of monthly disability is reduced by the sum that Bituach Leumi (National Insurance) pays the disabled employee. For example, if the employee is entitled to a 2000 NIS monthly disability payment from his pension fund and Bituach Leumi pays 1000 NIS a month, he will only receive 1000 NIS through the pension fund.
Because of these terms, some employees choose to take out private disability insurance which has more favorable terms. It starts earlier than 90 days, requires a lower percentage of disability and isn’t reduced by the amount of the Bituach Leumi payments.
Life Insurance (“Kitzvat Shearim”, literally, “allowance for heirs”): Under the pension plan, the surviving spouse will receive 60% of what the deceased would have been entitled to had he/she lived to retirement age. If, at the time of death, the deceased had children under the age of 21, there is a supplement to which the family is entitled until the child or children reach the age of 21.

Please note:

The benefits to which the beneficiary of a pension plan is entitled differ based on the age at which he/she entered the plan.
The sums that are put aside for the pension plan are reduced from the gross monthly salary and, as a result, lower taxable income. Therefore, when an employer offers a higher percentage, it is considered to be an employment perk.

Keren Hishtalmut

Keren Hishtalmut is an employee savings plan. It is not obligatory upon an employer to offer it to an employee, but rather it is considered to be a perk. These plans are typically offered to government workers and those in hi-tech related fields. Those who are self-employed also have the option of opening a Keren Hishtalmut privately.

Generally, the employer contributes 7.5% of the employee’s monthly salary while the employee contributes 2.5%. The funds put aside by the employer are not taxable either at the time of deposit or withdrawal, and this amount does not appear on the employee’s salary stub. Both the principle and the interest are tax free. The employee’s portion (2.5%) is taxable.

The funds put aside for a Keren Hishtalmut are closed for 6 years. The beneficiary of the plan can withdraw the money after the 6th year but is not obligated to do so.

Bituach Menahalim

The concept of Bituach Menahalim (Manager’s Insurance) has become irrelevant due to the new pension plan laws. Previously, when pension plans were optional, Bituach Menahalim was considered a substantial perk for more senior employees. Now that pension plans are obligatory across the board, the term is generally not used.

Nefesh BNefesh

Pension Plans