Understanding Pension Fund Withdrawals: What You Can Take and Costs

As retirement approaches, many Israelis grapple with questions about accessing their pension funds, with younger individuals also considering this for large expenses. The ability to withdraw funds largely depends on the type of money accumulated. Funds designated for pensions, specifically "retirement funds" (kesef ketsavati) deposited from 2008 onwards in pension funds or study funds, are legally mandated to provide a lifelong monthly income and cannot be transferred to a private investment portfolio.

Withdrawals of these designated pension funds before retirement are subject to a significant tax penalty of 35% or the individual's marginal tax rate, whichever is higher. This is intended to preserve the funds for their intended purpose. For example, withdrawing NIS 200,000 could result in receiving only about NIS 130,000, losing future returns and a portion of the future monthly pension.

"Capitalization" (ivun), the legal process to convert a portion of pension savings into a lump sum, is only possible if a minimum monthly pension is secured. As of 2026, this minimum is approximately NIS 5,306 per month, requiring a total accumulated sum of around NIS 1.1 million. Funds exceeding this threshold can be capitalized. The capitalized portion receives a partial tax exemption, which in 2026 stands at 57.5% and is set to increase to 67% by January 2028. Previous withdrawals of tax-exempt severance pay can reduce this exemption.

"Fixing rights" (kibu'a zechuyot) is a crucial process where the tax-exempt portion of a pension is determined with the tax authorities, impacting retirement income for years. In 2026, the maximum taxable pension ceiling is about NIS 9,430 monthly, leading to a maximum exemption of approximately NIS 5,422. Incorrectly fixing rights can cost tens of thousands of shekels over a decade.

Funds available for withdrawal include study funds after six years (tax-exempt on capital gains up to a limit), private investment portfolios (subject to 25% capital gains tax), legally withdrawn severance pay, pre-2008 savings with a capital component, and proceeds from asset sales. Investment accounts in "study funds for investment" (kufat gemel le'hashka'ah) are accessible at any time, subject to capital gains tax, or can be withdrawn as a pension by age 60 for tax exemption on profits. These are often used to supplement locked-in pension funds.

Individuals nearing retirement should review their pension statements to understand the proportion of funds deposited before 2008, their personal conversion factor, expected monthly pension, and available liquid assets outside the pension system. Adjustments can be made by increasing contributions, building liquid assets, or delaying retirement.