Israeli Pension System Overview

Three-Pillar Structure

Israel's retirement system is built on three main pillars:

1.        First Pillar: National Insurance Institute (social security)

2.        Second Pillar: Mandatory occupational pension savings

3.        Third Pillar: Voluntary personal savings

First Pillar: National Insurance (Bituach Leumi)

Old Age Pension

Eligibility:

ï           Men: Age 67 (gradually increased from 65)

ï           Women: Age 62 (gradually increasing to 65 by 2032)

ï           Must have at least 60 qualifying months of contributions

Benefit Calculation:

ï           Base amount + seniority increment

ï           Depends on income points accumulated throughout working life

ï           Average payment approximately 5,000-6,000 ILS/month (varies)

ï           Supplements available for dependents, low-income pensioners

Funding:

ï           Contributions from employees, employers, and self-employed

ï           Employer: 3.55-7.6% of salary (varies by income level)

ï           Employee: 0.4-12% of salary (progressive rate)

Types:

ï           Old age pension: Regular retirement

ï           Survivor's pension: For widows/widowers and orphans

ï           Disability pension: For those unable to work

ï           Income support for elderly: For those with insufficient contributions

Second Pillar: Mandatory Occupational Pensions

Historical Background

Pre-2008:

ï           No universal requirement

ï           Coverage was voluntary or through collective agreements

ï           Many workers reached retirement without adequate savings

2008 Reform (Mandatory Pension Law):

ï           All employees must be enrolled in pension savings from day one

ï           Applies to employees aged 20+ earning above minimum wage

ï           Employers required to contribute regardless of employee tenure

Mandatory Contribution Rates

Current Standard Rates:

Employer Contributions:

ï           Pension/provident fund: 6.5% of salary

ï           Severance pay component: 6% of salary

ï           Disability & loss-of-work insurance: 2.5% of salary (up to average wage)

ï           Total employer: ~14-15% of salary Employee Contributions:

ï           Pension/provident fund: 6% of salary (minimum)

ï           Many contribute more voluntarily

Contribution Ceiling:

ï           Calculated on salary up to approximately 3-4 times average wage

ï           Above this, contributions are voluntary

Types of Pension Products

1.  Pension Funds (Keren Pensiya - פנסיה קרן) Comprehensive Pension Funds:

ï           Include savings, severance pay, and insurance components

ï           Life insurance and disability coverage included

ï           Most common for employees

Old Pension Funds (pre-1995):

ï           Closed to new members

ï           Some still operate for existing members

ï           Often provided defined benefit (rare now)

New Pension Funds (post-1995):

ï           Defined contribution

ï           Investment returns not guaranteed

ï           Member bears investment risk

Features:

ï           Cannot withdraw before retirement (except specific circumstances)

ï           Must purchase annuity at retirement

ï           Survivor benefits included

ï           Tax-advantaged

2.  Provident Funds (Keren Hishtalmut - השתלמות קרן) General Provident Funds:

ï           Savings component only

ï           No insurance included

ï           More flexible withdrawal terms

ï           Can withdraw after 6 years (with tax benefits)

ï           Often used in addition to pension fund

Features:

ï           Shorter lockup period (6 years for tax benefits)

ï           Can be used for house purchase, education, retirement

ï           No requirement to purchase annuity

ï           More liquid than pension funds

3.  Life Insurance Policies (Bituach Managers - מנהלים ביטוח) Managers' Insurance:

ï           Combines savings, severance, and insurance

ï           Historically for senior employees

ï           Higher management fees than pension funds

ï           Life insurance and disability coverage

Features:

ï           More expensive fee structure

ï           Declining in popularity

ï           Being phased out in favor of pension funds

Contribution Allocation

Section 14 Agreements

Severance Pay Arrangement:

ï           Instead of accumulating severance debt, employers pay monthly into pension/provident fund

ï           6% of salary goes to "severance component" (Section 14)

ï           Employee waives right to claim additional severance at termination

ï           Most common arrangement today

Without Section 14:

ï           Employer accumulates severance debt

ï           8.33% of salary per year owed at termination

ï           Higher risk for employer

Tax Benefits

Contributions

Employee Contributions:

ï           Up to 7% of salary: tax-deductible

ï           Additional voluntary contributions: tax treatment varies

ï           Contribution limit: based on annual income cap

Employer Contributions:

ï           Up to 7.5% treated as non-taxable benefit

ï           Above this: taxable benefit to employee

Withdrawals

At Retirement:

ï           Lump sum: First ~800,000 ILS tax-exempt (indexed annually)

ï           Above this: progressive tax (reduced rates)

ï           Annuity payments: taxed as income (with some exemptions)

Early Withdrawal:

ï           Generally subject to higher tax rates

ï           Exceptions: disability, critical illness, emigration

Advanced Study Funds (Kranot Hishtalmut)

Structure

Not Mandatory but Very Common:

ï           Separate from pension

ï           Employer: 7.5% of salary

ï           Employee: 2.5% of salary

Tax Benefits:

ï           Employer contribution: tax-exempt benefit

ï           Investment returns: tax-exempt

ï           Withdrawal after 6 years: capital gains tax-exempt

Uses:

ï           Sabbatical/study leave

ï           House purchase

ï           Additional retirement savings

ï           General savings after 6 years

Investment Options

Fund Management

Types of Funds:

ï           General pension funds: Broad investment mandate

ï           Government bond funds: Conservative, lower returns

ï           Equity-heavy funds: Higher risk/return

ï           Life-cycle (target-date) funds: Automatic risk adjustment by age

ï           Passive/index funds: Lower fees

Default Fund Assignment:

ï           Age-based allocation required by law

ï           Younger workers → more equities

ï           Approaching retirement → shift to bonds

Member Rights

Switching Funds:

ï           Can switch pension fund once per year (no cost)

ï           Can change investment track within fund

ï           No penalty for switching

Fee Structure:

ï           Management fees: typically 0.5-1.5% of assets annually

ï           Deposit fees: 2-6% of deposits (capped)

ï           Declining trend in fees due to competition and regulation

Retirement Age and Withdrawal

Official Retirement Age

Current:

ï           Men: 67

ï           Women: 62 (transitioning to 65 by 2032)

Early Retirement

Age 60:

ï           Can access pension savings (with penalties)

ï           National Insurance benefits not yet available

ï           Reduced annuity payments due to longer life expectancy

Withdrawal Options

Lump Sum + Annuity:

ï           Can withdraw portion as lump sum

ï           Remainder must be annuitized (pension funds)

ï           Typical: 60-70% annuity, 30-40% lump sum

Programmed Withdrawal:

ï           Alternative to annuity

ï           Scheduled withdrawals over time

ï           Investment risk remains with retiree

Full Annuitization:

ï           Convert entire balance to monthly payments

ï           Insurance company bears longevity risk

ï           Payments guaranteed for life

Special Situations

Immigration

New Immigrants (Olim):

ï           Grace period before mandatory contributions

ï           Can transfer foreign pension rights

ï           Special tax benefits on foreign pensions

Emigration:

ï           Can withdraw pension savings if leaving Israel permanently

ï           Subject to tax

ï           Must meet residency requirements

Self-Employed

Requirements:

ï           Must save for own pension

ï           Required to contribute 4.45% of income (phased in gradually)

ï           Lower rates than employed workers

ï           No employer contribution obviously

Disability

Early Access:

ï           Recognized disability allows early withdrawal

ï           Insurance component pays out

ï           Medical committee approval required

Divorce

Division of Pension Rights:

ï           Pension savings considered joint property

ï           Divided according to years of marriage

ï           Court order or agreement required

Supervision and Regulation

Capital Market, Insurance and Savings Authority

Responsibilities:

ï           Regulates pension funds, provident funds, insurers

ï           Sets investment rules and restrictions

ï           Protects consumer rights

ï           Enforces disclosure requirements

Investment Restrictions

Limitations:

ï           Maximum exposure to specific asset classes

ï           Geographic diversification requirements

ï           Limits on single-company exposure

ï           Conservative requirements for near-retirees

Current Challenges and Reforms

Adequacy Issues

Concerns:

ï           Many current retirees have insufficient savings (pre-2008 workers)

ï           Gap between retirement age and healthy life expectancy

ï           Low contribution rates relative to replacement ratio goals

Target Replacement Ratio:

ï           Goal: 60-70% of final salary

ï           Current trajectory: many will fall short

ï           Depends on salary level, contribution years, investment returns

Fee Reduction

Recent Reforms:

ï           Fee caps introduced

ï           Increased competition

ï           Requirement to offer low-cost passive options

ï           Improved transparency

Portability

Improvements:

ï           Easier to switch providers

ï           Better comparison tools

ï           Centralized information system (planned)

Increasing Retirement Age

Ongoing Debate:

ï           Pressure to increase retirement age further

ï           Life expectancy increasing

ï           Financial sustainability of National Insurance

Pension Calculation Example

Typical Worker Profile:

ï           Salary: 15,000 ILS/month (180,000 ILS/year)

ï           Works 35 years with mandatory contributions

ï           Average investment return: 4% real (after inflation)

Contributions:

ï           Employer: 12.5% = 1,875 ILS/month

ï           Employee: 6% = 900 ILS/month

ï           Total: 2,775 ILS/month = 33,300 ILS/year

Accumulated Savings (simplified):

ï           After 35 years: approximately 2.7-3 million ILS

ï           Monthly annuity: approximately 10,000-12,000 ILS

ï           Plus National Insurance: approximately 5,000-6,000 ILS

ï           Total monthly retirement income: 15,000-18,000 ILS

(This is illustrative; actual results depend on many variables)

Practical Tips

For Employees

Check Your Pension:

ï           Review annual statements

ï           Verify contributions are being made

ï           Check fee levels

ï           Consider switching to lower-fee funds

Increase Contributions:

ï           Even 1-2% extra makes significant long-term difference

ï           Tax benefits make it more affordable

ï           Especially important if starting later in career

Diversification:

ï           Consider having both pension fund and advanced study fund

ï           Don't put everything in one product type

For Employers

Compliance:

ï           Must enroll employees from day one

ï           Timely contribution payments

ï           Proper reporting

ï           Heavy penalties for non-compliance

Key Takeaways

1.        Universal Coverage: Since 2008, all employees must have pension savings

2.        Three Components: National Insurance + mandatory occupational pension + voluntary savings

3.        Defined Contribution: Most pensions are now DC, not DB - investment risk on individual

4.        Long Lock-Up: Pension funds generally can't be accessed until retirement

5.        Tax Advantages: Significant tax benefits encourage saving

6.        Member Choice: Can choose funds and investment tracks

7.        Adequacy Concerns: System relatively young; many current retirees have gaps

The Israeli pension system has improved significantly since the 2008 reforms, but challenges remain around adequacy, fees, and ensuring sufficient retirement income for all workers.

Updated on: 01/02/2026