The Ministry of Finance has presented a series of drastic measures aimed at reducing the fiscal deficit to 4% next year, among them taxation of advanced training funds, which up to now have essentially been a tax-free savings program. In its explanation of that move, the ministry stated that the state preferred to encourage long-term saving through pension funds, and to that end it gave tax benefits amounting to NIS 24 billion annually. In that very same budget document, however, the Ministry of Finance proposes to cut tax benefits promised to pension savers.
There are currently several tax benefits for pension savings. There are benefits for employers and employees on deposits into pension funds; during the accumulation stage, pension savings are exempt from capital gains tax; and at the withdrawal stage, a partial exemption is given on pension payments. In 2024, 52% of the entitled amount in a monthly pension payment (currently up to NIS 9,430) is exempt from income tax. Under a commitment given by the Ministry of Finance over a decade ago, the percentage is due to rise to 67% in 2025. The Ministry of Finance now seeks to back out of the increase.
Until 2012, the tax benefit was on 35% of the entitled amount. From 2012, in order to encourage pension saving, it was decided that the percentage would gradually increase to 67% by 2025.
How will rescinding this commitment affect pensioners? According to a calculation by retirement planning expert Ron Keshet, on a monthly pension of NIS 10,000, the extra tax will be NIS 192, or NIS 2,298 annually. On a pension of between NIS 20,000 and NIS 45,000 monthly, the additional tax will be NIS 5,746 in a year.
"Hundreds of thousands of people will have to adjust their retirement plans," Keshet says. "The damage is huge. Some of the damage can’t be seen in the regular tables and calculations, because many people do not fall within the regular categories."
Keshet provides a real-life example of the kind of difficulty that can arise. "A person came to me who could receive a pension of NIS 14,000 a month. Since I know that they have a large income from real estate and other sources, I recommended that he should reduce the pension payment to NIS 6,000 and withdraw the balance of over NIS 1 million as a cash lump sum. That was meant to save him NIS 350,000 in tax. But had he known that the Ministry of Finance planned to wreck the plan, and that he would not be able to withdraw the cash amount without paying a high rate of tax, he would instead have taken the NIS 14,000 monthly payment and not be stuck with a pension of NIS 6,000. That’s a life-changing difference. Now he’s stuck, because once you fill in the forms your rights are fixed. The damage to people is big money."
What difference will the change make to state revenues? According to Ministry of Finance estimates, it should bring in an extra NIS 400 million from 2025.
As with the proposal to tax advanced training funds, Histadrut (General Federation of Labor in Israel) chairperson Arnon Bar-David has announced that he will not allow a reduction in tax benefits on pensions. The Ministry of Finance has already tried many times to cut pensions benefits without succeeding. It is still not clear whether the ministry is determined to push the measure through this time, or whether the proposal is a bargaining chip to be given up in negotiations with the Histadrut on other matters, such as a freeze on public sector pay.
Published by Globes, Israel business news - en.globes.co.il - on September 25, 2024.
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