Israel Unveils Unified Investment Account Reform Amid Low Utilization of Current Tax Exemptions

The Israeli Ministry of Finance recently introduced a major reform creating a unified investment account that consolidates mutual funds, investment provident funds, and savings policies under one framework with harmonized tax conditions. The reform aims to encourage transferring money from current accounts to investment products, potentially increasing tax revenues.

Currently, investment provident funds offer a full capital gains tax exemption for withdrawals made as a pension after age 60. However, new rules will cap this tax exemption at 200,000 shekels, affecting the ability to switch investment tracks without immediate taxation. Data from 2021 to 2023, shared by the Investment Houses Association, reveals that only 0.04% to 0.06% of savers actually utilized the pension withdrawal exemption, with most withdrawals occurring before age 60 and thus not benefiting from the tax break.

The reform will eliminate all existing tax benefits across mutual funds, provident funds, and savings policies, including deferred taxation on switching investment tracks beyond the 200,000 shekel threshold. This change is expected to increase tax revenues by encouraging funds to move into taxable capital market investments, private consumption, or real estate.

A legal opinion commissioned by the Investment Houses Association estimates the new unified account could generate about one billion shekels annually in additional tax revenue, based on a 4% real return assumption. The Ministry of Finance maintains the reform is fiscally neutral, redistributing tax benefits rather than increasing the overall tax burden. However, critics argue the low current use of tax exemptions justifies expanding them to incentivize longer-term savings.

Nimrod Sapir, CEO of the Investment Houses Association, called the reform a significant consumer benefit that will enhance market competition and transparency, but urged reconsideration of the 200,000 shekel cap to better support medium-term savings. The Ministry of Finance confirmed ongoing reviews of pension product tax incentives to potentially encourage higher contributions.

Overall, the reform seeks to shift Israeli savings from low-yield current accounts to investment vehicles, while balancing tax incentives and government revenue goals. The next government’s adoption of the reform will determine its final impact on savers and the economy.