Leaving Israel: Pension and Insurance Coverage Changes Explained
When Israelis move abroad, their pension and insurance coverage undergoes significant changes once deposits cease. In pension funds, automatic insurance coverage, known as 'risk coverage,' lasts for five months after the last deposit. For 'manager's insurance' policies, this period is shorter, ending after three months. While deposits stop, severance pay funds continue to accrue value and returns as usual. This automatic coverage can be extended by paying a premium. Pension funds allow extensions up to 24 months, or for the last continuous period of insurance, while manager's insurance extensions may be shorter. After this period, without new deposits, insurance coverage ends, and any accumulated insurance seniority is reset. Those who resume deposits later must start over.
Individuals face a choice: pay for extended risk coverage, make independent deposits to maintain insurance, or purchase equivalent coverage in their new country of residence. Health insurance is handled separately through National Insurance. Management fees continue to be charged on the remaining balance, typically ranging from 0.5% to 2% annually, and can increase to the legal maximum for inactive accounts. These fees are charged on static balances for years, potentially depleting the fund.
Withdrawing severance pay before leaving Israel can fund the move but has future financial consequences. Every NIS 100,000 withdrawn reduces the future tax exemption ceiling by NIS 135,000, based on a multiplier of 1.35. The impact on monthly pension payments is more severe, with withdrawals potentially cutting monthly pensions by about 40%, totaling up to NIS 192,000 over 20 years.
The remaining invested funds in pension and severance accounts continue to grow based on their chosen investment track, but without active management for adjustments or fee comparisons. This can be disadvantageous compared to managing these accounts while still in Israel. Additionally, severing tax residency can trigger separate tax events on assets held abroad. Severance pay withdrawals made while still employed in Israel are taxed at a higher bracket than those made when Israeli income is zero.
Withdrawals by non-residents from Israeli financial institutions default to withholding tax at the source. Obtaining any available tax treaty benefits requires declarations and documentation, which is simpler while still an Israeli resident. Maintaining an Israeli address and bank account helps manage these accounts, otherwise, annual reports may go to old addresses, and accounts could be flagged as dormant. Returning individuals may find their accounts still active, minus the management fees collected over the years.
