Israel Raises Tax Exemption on Pension Allowances with Key Planning Steps for Retirees

In 2026, the tax exemption rate on qualifying pension allowances in Israel has increased slightly to 57.5%, up from 57% in 2025. The monthly ceiling for the qualifying pension allowance is set at approximately 9,430 shekels, resulting in a maximum tax-exempt amount of about 5,422 shekels per month. This exemption is part of a gradual multi-year plan, with the exemption rate expected to rise to 62.5% in 2027 and reach 67% from 2028 onward, assuming the ceiling remains stable.

The pension allowance exemption applies to pensions paid from pension funds, provident funds, managerial insurance, or budgeted pensions, but only partially, unlike fully exempt recognized pensions. Retirees who previously withdrew tax-exempt severance payments may see their pension exemption reduced due to a formula known as the "combination formula." This formula reduces the exempt capital by 1.35 times the inflation-adjusted amount of severance payments withdrawn within 32 years before eligibility age. For example, withdrawing 100,000 shekels in exempt severance reduces the exempt capital by about 135,000 shekels.

To realize the exemption, retirees must perform a "rights fixation" by submitting Form 161D to the Israeli Tax Authority. This form specifies how the exemption is allocated between monthly pension allowances and lump-sum withdrawals such as retirement grants or pension capitalization. Decisions made in this form are nearly irreversible, making careful planning and professional consultation essential. The total exempt capital ceiling in 2026 is approximately 976,000 shekels, representing 180 months of maximum exempt pension.

Additional tax benefits for retirees include credit points and regional exemptions under certain conditions. The article emphasizes that each case is unique and recommends consulting experts before making decisions. Retirees expecting long-term high monthly pensions generally benefit more from preserving the exemption for monthly allowances, while those needing immediate liquidity might prefer some lump-sum withdrawals despite the long-term reduction in exemption.

The article concludes with a detailed Q&A explaining key concepts such as qualifying pension allowances, the combination formula, the rights fixation process, and the differences between qualifying and recognized pensions, providing retirees with comprehensive guidance on maximizing their tax benefits.