New Employees Often Overlook Crucial Pension and Savings Decisions
Many new employees in Israel fail to make informed decisions about their pension and severance funds during their first month of employment, leading to potentially significant financial losses over their careers. While initial salary discussions might focus on gross pay, the actual amount deposited into retirement accounts and the specific funds chosen are often left to default settings, which can be costly.
The mandatory pension contributions in Israel amount to 18.5% of an employee's salary, with 6% deducted from the employee's pay and the remainder contributed by the employer. This contribution is legally required for salaries up to the national average wage, which was approximately 13,769 shekels in 2023. Employees can receive tax credits for their contributions, and the employer's portion, particularly for severance pay, represents funds that would not otherwise be received by the employee.
Crucially, new employees who do not have a prior pension fund may only start accumulating benefits after six months, while those with an existing fund can have contributions backdated. Opting out of default choices, such as selecting a pension fund with lower management fees or a more suitable investment track based on age and risk tolerance, can result in hundreds of thousands of shekels difference by retirement.
Beyond pensions, severance funds (Keren Hishtalmut) are also a significant benefit, though not legally mandated in the private sector. These funds offer tax advantages, with profits exempt from capital gains tax and funds accessible after six years. Employers typically contribute 7.5% of salary, with the employee contributing 2.5%, creating a 3:1 contribution ratio. Failing to negotiate for a severance fund during hiring can mean missing out on substantial tax-advantaged savings.
Experts advise new employees to actively manage these decisions from day one. This includes filling out the tax form (101) correctly, checking their assigned pension fund and management fees, ensuring their investment track aligns with their long-term goals, and inquiring about or negotiating for a severance fund. Proactive engagement can significantly impact long-term financial well-being.
