Israeli Finance Ministry Proposes Major Savings Market Reform Despite Regulator Opposition

The Israeli Finance Ministry is advancing a significant reform in the savings products sector, aiming to unify tax treatment across investment savings accounts, mutual funds, and savings policies. This move contradicts the strong opposition of the Capital Market Authority Commissioner, Amit Gal, who has argued since the initial interim report in April 2023 that the reform is unnecessary and could reduce competition by imposing complex regulatory demands on existing products.

The reform, presented in the presence of Finance Minister Bezalel Smotrich and led by Securities Authority Chairman Safi Singer, follows two years of work by the "Arbitrage Committee." It proposes creating a consolidated investment account where savers can view all their investments in one place. The current tax benefit of about 2 billion shekels annually for investment savings accounts would be capped and extended to all products, with a maximum exemption limit of 200,000 shekels per saver. Unlike previous expectations, account opening will be allowed from birth, not just from age 18.

The plan requires complex legislation, likely to be introduced in the next state budget law, meaning it will be implemented by the incoming government. The reform introduces deferred taxation on investment transactions within the account, with tax payable only upon withdrawal. Pension withdrawals after age 60 will be fully tax-exempt up to the 200,000-shekel cap. This contrasts with the current system, where annual deposits up to approximately 83,000 shekels receive full capital gains tax exemption upon pension withdrawal, sometimes resulting in multi-million shekel benefits.

Critics argue the reform mainly serves to reduce tax benefits and complicates the system, potentially increasing costs for consumers. The creation of the new investment accounts is expected to be technologically and bureaucratically challenging, with costs likely passed on to the public. Notably, the four largest banks will be excluded from the platform for the first three years, leaving non-bank members of the stock exchange and smaller banks to foster competition.

Securities Authority Chairman Safi Singer defends the reform as a consumer-focused revolution that promotes competition and quality without increasing or decreasing overall tax benefits. He envisions automatic investment account openings alongside bank accounts in the future. The Finance Ministry’s chief economist, Shmuel Abramzon, noted that investment advisors will need dual licenses to operate under the new system, allowing insurance agents and bank advisors to expand their product offerings. The reform’s fiscal neutrality and long-term impact remain subjects of debate.