Israelis Missing Out on Pension Tax Breaks Due to Bureaucracy
Many retirees in Israel are paying taxes on their pensions unnecessarily because they are unaware of or hesitant to navigate the complex process of claiming tax exemptions. While the state offers significant tax relief on retirement income, estimated to be worth hundreds of thousands of shekels, a bureaucratic procedure with the tax authorities prevents most pensioners from utilizing this benefit.
The transition to retirement often involves a substantial drop in income, and many Israelis adjust their lifestyles accordingly. However, a considerable number are unknowingly having their pension income reduced by income tax payments that could be significantly lowered or eliminated. This occurs because, unlike a common misconception, pension payments are legally considered taxable income in Israel, subject to standard tax brackets.
The Israeli tax law does provide a mechanism for tax exemption on a portion of retirement income, but it is not automatic. The Tax Authority does not proactively inform retirees of their eligibility. Without an active request and a formal process, pension funds are obligated to deduct the maximum tax amount.
The key to accessing these benefits is a statutory procedure called 'fixing rights' (Kibua Zechuyot). This involves formally declaring to a tax official how one wishes to utilize their "exemption basket." This basket can be used for tax-free monthly pension payments, a tax-free lump-sum withdrawal (capitalization of pension), or for offsetting taxes on severance pay. Making errors in this process can lead to the loss of significant tax benefits over time.
Experts attribute the low utilization rate to the complexity of the system. Many retirees mistakenly believe their pension fund managers handle all tax matters, when in reality, these managers focus on investments and basic operations, not personalized tax planning. The process requires submitting complex forms, gathering historical employment and withdrawal data, which can be overwhelming for individuals without an accounting or tax background.
Furthermore, there is a limited window to correct any mistakes made during the 'fixing rights' process. Incorrectly filled forms can lock in unfavorable tax arrangements for years, leading to substantial unnecessary tax payments. Professional guidance is increasingly seen as essential to ensure maximum net income and avoid irreversible financial errors during retirement.
