New Investment Account Proposal Could End Tax Benefits for Pension Funds
Translated & summarized from Calcalist by baba
Israel's Ministry of Finance has proposed a new "investment account" that would equalize tax benefits across various savings products, potentially ending the unique advantages of investment-linked pension funds. The plan replaces the annual deposit limit with a lifetime NIS 200,000 tax-exempt cap, affecting long-term savers. While most current savers may not be impacted, the move is expected to slow the growth of these funds.
The story in 5 lines · by baba
- New Israeli investment account proposal could end unique tax benefits for pension funds.
- The plan replaces annual deposit limits with a lifetime NIS 200,000 tax-exempt cap.
- Tax-free switching and pension withdrawal benefits would extend to other investment products.
- Most current savers are not expected to be negatively impacted by the change.
- The proposal aims to reduce regulatory disparities in savings products.
Israel's Ministry of Finance unveiled recommendations from an arbitration committee aimed at reducing regulatory disparities in savings products. Developed by the Israel Securities Authority, the core proposal involves establishing a new "investment account" that would allow the public to invest in various products, including investment-linked pension funds (kupot gemel le'hashka'ah), savings policies, mutual funds, and securities, under similar tax conditions. This change would extend key advantages of investment-linked pension funds, such as tax-free switching between investment tracks and tax exemption on withdrawals as a pension after age 60, to other investment vehicles, diminishing their unique appeal.
In addition to broadening these benefits, the committee proposed replacing the current annual deposit ceiling for investment-linked pension funds, approximately NIS 83,000, with a lifetime tax-exempt deposit cap of NIS 200,000 within the new investment account. This means that the potential for tax-free pension withdrawals, which could amount to hundreds of thousands of shekels over time, would be limited to NIS 200,000. Holdings in mutual funds and direct stocks would also count towards this limit alongside investment-linked pension funds.
The Ministry of Finance estimates that 91% of existing investment-linked pension fund accounts do not currently reach the existing ceiling, suggesting most savers would not be negatively impacted. However, for families saving over decades, including for their children, this represents a significant reduction in potential benefits. The transition to the new investment account is expected to serve as an alternative to current investment-linked pension funds and could substantially slow their growth. Financial institutions note that current inflows into these funds are also driven by a desire to secure existing tax benefits on savings.