Israeli Study Reveals Significant Value of Severance Funds

A severance fund, known as a 'Keren Hishtalmut' in Israel, offers substantial financial benefits to employees, often exceeding initial perceptions. Typically, 75% of the deposited amount originates from the employer, with profits on these contributions enjoying tax exemptions. The funds become accessible after six years, but leaving them invested for an additional decade can transform them into one of an individual's largest assets due to compound interest.

Employees contribute 2.5% of their salary, while employers add 7.5%, meaning for every shekel from the employee, three are added by the employer. The salary cap for full tax benefits is NIS 15,712 per month. For an employee earning this maximum, monthly contributions reach approximately NIS 1,571, with NIS 1,178 from the employer and NIS 393 from the employee.

The primary advantage lies in taxation. Profits accumulated on these contributions can be withdrawn tax-free as capital gains, provided the fund meets certain conditions. In contrast, profits from a regular investment portfolio are typically taxed at 25%. Over 15 to 20 years, this tax difference can amount to tens of thousands of shekels.

For instance, an employee earning NIS 12,000 monthly, with NIS 900 employer contributions per month, could see their fund reach around NIS 104,000 after six years, assuming a 6% annual return. If the funds remain invested, this could grow to approximately NIS 349,000 after 15 years and NIS 554,000 after 20 years. Of the 20-year total, NIS 288,000 represents total deposits, with the remainder from investment profits.

Employees earning at or above the salary cap and contributing the full amount see even larger figures. After 20 years, their fund could reach about NIS 726,000, with roughly NIS 349,000 stemming from profits. The tax savings on these profits alone approach NIS 90,000.

Choosing the right fund and investment track is also crucial, as risk levels and potential returns vary significantly between general, stock-focused, index-tracking, and other options. Differences in management fees, even seemingly small percentages, can accumulate to tens of thousands of shekels over time. It is important to note that the six-year mark signifies liquidity, not a mandatory withdrawal date, allowing funds to continue growing with preserved seniority. Employees can also switch between tracks and fund managers without losing seniority. While deposits above the NIS 15,712 cap may occur based on employment agreements, they receive different tax treatment, highlighting the importance of distinguishing between the deposit itself and the full state-provided benefit.