Withdrawing Pension Funds Costs Tens of Thousands More Than Expected

A new online tool reveals that withdrawing NIS 160,000 in severance pay after nine years of employment can result in a net loss of NIS 111,237 compared to leaving the funds to grow until retirement age. The employee in question received NIS 148,763 after taxes, while the funds, if left until age 67, would have grown to NIS 727,901 and added NIS 3,640 to the monthly pension.

The total difference favoring leaving the funds untouched is NIS 602,528, according to calculations by the new tool. This includes the difference in accumulated value and a third component often overlooked: NIS 23,389 in damage to future pension tax exemptions. This damage occurs because for every NIS of severance tax exemption withdrawn, the future pension exemption is reduced by NIS 1.35 over the 32 years preceding eligibility.

The tool requires input on severance amount, years of tenure, current age, monthly salary, estimated return, and planned retirement age. Users can then choose to withdraw the entire amount, half, a quarter, or nothing, with the results updating instantly. The current tax exemption ceiling is NIS 13,750 per year of tenure, meaning nine years of service grant an exemption on NIS 123,750. The remaining NIS 36,250 is subject to full marginal tax, which in this case amounted to NIS 11,238. Spreading this one-time income tax over up to six years can reduce the immediate tax burden.

Years of tenure significantly impact the outcome. An employee with only three years of tenure and the same severance amount would only receive an exemption on NIS 41,250, with the rest taxed at the marginal rate. Longer tenure increases the tax-exempt portion but also magnifies the damage to future pension exemptions. The option to withdraw half or a quarter allows individuals needing immediate funds to withdraw only up to their exemption limit, leaving the rest to grow.

The decision regarding severance pay is typically made on Form 161 upon leaving employment, often under pressure. The current tax exemption rate on pensions is 57.5%, applied to a maximum pension of NIS 9,430, multiplied by 180 to determine the exemption basket. This rate is set to increase to 62.5% next year and 67% the year after, meaning the future exemption basket will grow, altering the relative damage of early withdrawal.

For the employee examined, with 26 years until retirement, the potential loss is substantial. A 60-year-old with the same data would see a smaller difference, making the decision closer. The article also briefly touches on early withdrawals before retirement age, penalties, and exceptions, as well as the complexities introduced by changing jobs, where previous severance and pension grants can affect current calculations and require verification with the Tax Authority.