The purpose of this post is to cover the main Hebrew terms used in the Israeli investment and pension scene in Israel. Hopefully it will help clear up confusion between structures that have very similar terms but different rules. My definitions here are necessarily brief but I hope this drives people to read further and gain more knowledge about this sector. May we see an end to the fear of investing and exploring how your pensions are structured, acts that can turbo-power your finances thanks to the power of compound interest.
Let me know if you think there are any important terms that I’ve missed!
- ביטוח / חיסכון פנסיוני Bituaẖ / H̱isachon Pensioni (general term) – pension insurance / pension savings. See here for an excellent overview. Refers to a bundle of insurance (against death or disability) and tax-deferred savings for retirement (which could equally be regarded as insurance against the common occurrence of reaching old age). Comes in three types, in the private sector:
- (קרן פנסיה חדשה (מקיפה/כללית Keren Pensia H̱adasha (Makifa / Klalit) – all-encompassing pension fund automatically including insurance components. A key feature is mutual liability (Arevut Hadadit) with other members: see Izun Aktuari. Another key feature (for Makifa but not for Klalit) is access to Agaẖ Meyo’adot: see further down for definition.
- ביטוח מנהלים Bituaẖ Menahalim – individual pension insurance contract where terms are more certain; doesn’t automatically include insurance components but these can be added.
- קופת גמל Kupat Gemel – comes in Nihul Ishi format too (self-management of fund)
- קרן השתלמות Keren Hishtalmut – salary-based medium-term investment structure with lots of tax benefits. Comes in Nihul Ishi format too (self-management of fund).
- קופת גמל להשקעה Kupat Gemel LeHashka’a – tax-exempt savings plan. You put in cash taken from net income or from savings and can invest it for retirement, but it’s liquid and can be withdrawn earlier if needed. (This is very approximately similar to a Roth IRA.) At present, doesn’t come in Nihul Ishi format (self-management of fund); you have to leave your money to be managed by someone else.
- תיק השקעות Tik Hashka’ot – investment portfolio. Not a tax structure per se but just a regular investment account with no tax benefits, included purely for comparison.
Comparison table of tax benefits
The table below shows the main tax-related features of each fund type. The rules in the table are geared towards Sekhirim (salaried employees); Atsma’im (the self-employed) should see the table relevant to them here. Note to US citizens: you have extra taxation from the US government which affects these funds and are not addressed in this table.
iican also use marginal tax rate
iiicertain professions can get higher percentages, such as teachers.
ivan additional tax benefit is that while money is locked in the fund, profits are not taxed; only at the point of withdrawal.
The rules for pension insurance in Israel are insanely complicated, even if less complicated than the situation in the US. (If you think it isn’t complicated, consider how many small details and nuances are missing from the table above, and how there are tens of thousands of people whose entire job is to understand, apply and explain these rules, created not by the laws of nature, but by the government and pension institutions over many years.) As such, the table above omits many important details such as ceilings and permitted rates, and what happens when you break these; insurance elements; how money must be withdrawn; different treatment of Pitsuyim; and rules for Atsma’im.
Types of securities and fund structures
Separately to the tax structure selected, you may have the option, or need, to select which asset classes you invest in. This is most relevant for a regular Tik Hashka’ot, or for one of the Nihul Ishi (self-management) options in the tax structures. Below are some of the main terms used in the Israeli investing scene:
- ניירות ערך Nyarot Erekh – securities
- בורסה Bursa – stock market
- מניות Mnayot – shares
- (אג”ח (אגרות חוב Agaẖ (short for Igrot H̱ov) – bonds
- אג”ח קונצרניות Agaẖ Kontserniyot – corporate bonds
- אג”ח ממשלתיות Agaẖ Memshaltiyot – government bonds
- אג”ח מיועדות Agaẖ Meyo’adot – special “designated” government bonds only available to Karnot Pensia Makifot, up to a maximum of 30% of the fund, that give an inflation-linked interest rate of 4.86%. Effectively a government subsidy of pension funds designed to stabilise their returns.
- (מט”ח (מטבע חוץ Mataẖ (short for Matbea H̱uts) – foreign currency
- נדל”ן Nadlan – property
- מדד Madad – index
- קרן סל Keren Sal (ETF) – same as an ETF (index fund whose units you can buy and sell on the stock market just like shares).
- תעודת סל Te’udat Sal (ETN) – this was until recently a widespread fund structure in Israel, but has been phased out and merged with Karnot Sal (ETFs), to align with the fund type most used in Europe and North America.
- קרן נאמנות Keren Ne’emanut – mutual fund
- משיכה הונית / היוון Meshicha Honit (also Hivun) – lump sum withdrawal
- קצבה Kitsba – annuity-style withdrawal
- גיל פרישה Gil Prisha – retirement age
- אובדן כושר עבודה Ovdan Kosher Avoda – incapacity to do work (Income Protection Insurance against this is a standard component of pensions)
- (ביטוח שארים (שארי נכה / שארי מוות Bituaẖ She’erim (She’ere Necheh / She’ere Mavet) – Dependents’ insurance (may cover disability or death)
- הפרשות מעסיק / תגמולי מעסיק Hafrashot Ma’asik / Tagmule Ma’asik – employer’s contributions
- הפרשות עובד / תגמולי עובד Hafrashot Oved / Tagmule Oved – employee’s contributions
- פיצויים Pitsuyim – severance pay compensation – additional contributions by the employer to the pension that you can withdraw if employment is terminated in certain conditions (e.g. being fired). If you don’t withdraw it, it simply adds more money to the retirement pot.
- מנגנון) איזון אקטוארי) – (Mangenon) Izun Aktuari – actuarial balance (mechanism). In a Keren Pensia there is mutual liability with other members: unlike a regular insurance contract, where the insurance company pays out of its own pocket, in a Keren Pensia, payouts (for disability, death and old age) come out of the fund itself. If these debts in a given year work out higher than the fund originally expected to pay when it did its initial actuarial calculation, all the members pay out of the fund, appearing as an extra fee on your account. If the debts are lower, you get a bonus instead.
- מסלול השקעה Maslul Hashka’a – investment track. In most pension funds, the money is managed for you, and you can choose only a very general policy for the investment, not specific funds to invest in. Typical Maslulim will be “General”, “Shares”, “Bonds”, “Aged 50 and under”, and others.
- ריסק זמני Risk Zmani – temporary, stop-gap payments into a pension fund to cover the cost of just the insurance components of the fund. This is done to keep the fund active during a period in between jobs when no deposits are being made otherwise.
- מקדם המרה / מקדם קצבה – Mekadem Hamara / Mekadem Kitsba – “conversion coefficient” – quite simply, the monthly stipend from a pension is calculated by dividing the accumulated balance by this coefficient. The coefficient reflects actuarial calculations taking into account life expectancy, retirement age, return on investment etc.
- קצבה מזכה / קצבה מוכרת – Kitsba Mezaka / Kitsba Mukeret – taxable pension allowance / tax-exempt (“recognised”) pension allowance. On pension contributions, you only pay income tax once:
- Contributions on which you got a tax break (Nikui / Zikui) at the point when they were deposited into the pension go towards the taxable pension allowance (Kitsba Mezaka); they are tax-deferred.
- Contributions on which you didn’t get a tax break at the point of deposit go towards the tax-exempt pension allowance (Kitsba Mukeret); they have already been subjected to taxation. It’s important to ensure that these contributions are recognised as such so that you can be exempt from tax on receipt of this part of your pension. Examples of contributions that count towards the tax-exempt pension allowance:
- Employee contributions above the ceiling for Zikui
- Employer contributions above the ceiling for tax-exemption at the point of deposit
- Pitsuyim above the ceiling for tax-exemption at the point of deposit
- Contributions to a Kupat Gemel LeHashka’a
- קרן מחקה / תעודה מחקה Keren Meẖaka / Teuda Meẖaka – tracker fund. Goal is to track a reference index (e.g. S&P 500) as closely as possible. Also known as Okev Madad (index tracker).
- מס) רווחי הון) (Mas) Rivẖe Hon – capital gains (tax)
- דמי ניהול Dme Nihul – management fees
- ניהול אישי Nihul Ishi – self-management: when you can choose your own funds.
- בית השקעות Bet Hashka’ot – investment platform / broker. Along with the banks, these are members of the stock market through whom you can open an account and trade securities. Examples include Meitav Dash, Psagot and IBI.