Mandatory pensions for the self-employed

In 2017, it became mandatory for the self-employed in Israel to contribute money to their own pension fund, even if they are exempt dealers (osek patur).

Type of fund? The pension fund must be an approved Israeli fund, such as a regular pension fund, managers’ insurance or provident fund. A foreign product is not sufficient for this purpose. Which is right for you? You should consult a pension specialist as well as your accountant

Who is obliged? The pension-funding requirement applies to people aged 21-60 who have been self-employed at least six months. The requirement does not apply to people aged 55 or more as of January 1, 2017, i.e. were born before January 1, 1962. There is no exception for anyone who takes an early retirement pension – they must keep funding their pension(s) until age 60. How much? The obligation to fund a pension applies to business profit from the first shekel up to NIS 9,673 (in 2017). That means there is no need to fund a pension if you are losing money. How much must be paid in? The maximum that must be paid in is NIS 842 per month, or NIS 10,104 per year (for 2018). On the first NIS 4,953 per month (half the average national salary), 4.45% is due;, on additional income up to NIS 10,104 per month, 12.55% is due. Above that, no further payments are required.

Who is exempt? First, anyone who has already paid into their pension fund NIS 842 per month as a self-employed person. Second, anyone who has paid NIS 842 or more as an employee if they are also employed. Third, anyone born before 1962. Fourth, anyone below age 21 or above age 60 (starting in 2018) on December 31 of the year concerned.

“Severance”: One-third of the amount deposited may be withdrawn as exempt severance pay, up to NIS 12,200 per month, in certain cases: if you stopped working in the profession due to serious illness, closed the business or reached retirement age in certain cases.

Penalties: Starting in 2019, penalties may be imposed on self-employed people who did not pay into a pension fund as required in 2018. But first, you may get a warning from the bailiffs.

“Study funds” (keren hishtalmut) are also common but not mandatory in Israel. These are really tax-efficient savings plans.

The self-employed can contribute 7% to a study fund and deduct 4.5% as an expense within prescribed limits. By contrast, in the case of employees, the employer usually pays 7.5% of gross salary, and the employee pays 2.5% up to prescribed limits.

If no withdrawals are made for at least six years after the fund is opened, there should be no tax on investment income and gains derived via the fund, no tax on withdrawals after six years, and the individual can use the money for any purpose if no withdrawals are made for six years.

In 2018, for self-employed persons, the maximum income for tax breaks is NIS 261,000, and the maximum annual contribution allowed into the fund is NIS 18,240.

Next step: If you are self-employed, review the above with a pension specialist. Also review life insurance, disability insurance, study funds and so forth.

As always, consult experienced tax advisers in each country at an early stage in specific cases.