The new pension reform: a heavy blow to savers or a balanced package?
With the submission of the Finance Ministry's arbitration committee recommendations, most headlines focused on the bad news for pensioners. However, an in-depth analysis of the numbers and data reveals a much more complex picture. When will the changes take effect, what is the "tax trap" that will be abolished, and what are the three positive pieces of news that no one is talking about?
The Finance Ministry's arbitration committee, headed by former Finance Ministry directors-general Shlomi Heisler and Ilan Rom, submitted its long-awaited recommendations for the financial savings market after two and a half years of intensive work. While most headlines in the economic sections rushed to focus on the bad news—the cancellation of historical tax benefits for pensioners—a professional examination of the data shows that the Israeli public is facing a comprehensive and balanced financial package.
The bad news: cancellation of the sweeping tax exemption for pensioners
According to the current legal situation, a saver who reaches the age of 60 and chooses to withdraw their pension savings as a monthly pension enjoys a full and sweeping tax exemption on the pension for the rest of their life. The committee's recommendation is to completely abolish this sweeping exemption and bring the taxable part of the pension under a taxation mechanism, a step that will hurt the pockets of future retirees, explains CPA Tzachi Mane, founder and owner of Mane Accounting.
The cancellation of the sweeping tax exemption at age 60 is a direct blow to a historical benefit that many pensioners relied on. This is a step that will directly hurt the pockets of those planning their retirement in the coming years, and anyone who counted on this benefit must now readjust. However, Mane clarifies that the committee's stated goal in this step is to create uniformity and align all savings channels in the economy.
Three good pieces of news that no one is talking about
Alongside the blow to the historical exemption, the committee presented three significant structural reforms designed to ease the burden on the public and lower savings costs:
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The setting of a uniform 25% tax on capital gains in all savings instruments, instead of the complex and confusing combination that exists today between mutual funds, savings policies, and provident funds. As CPA Mane notes: "The current mess in tax rates confuses the public and weakens competition between entities. Setting a uniform and transparent tax rate of 25% in all savings instruments is a simplifying and critical step for the benefit of the consumer."
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The establishment of a central investment account that allows free movement between tracks and companies without a tax event. Today, a saver's move from one investment house to another is considered a tax event requiring immediate payment of tax on profits, a situation that created a phenomenon that CPA Mane defines as a "tax trap"—a situation where the public remains stuck in an unrewarding financial entity or on the wrong track just to avoid paying the tax at that moment. The new step is expected to break this trap and increase market competition.
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A dramatic increase in the deposit ceiling for an investment provident fund, which is currently limited to about 83,000 shekels per year. As Mane emphasizes: "Raising the ceiling above 83,000 shekels is huge news for anyone who wants to save seriously, as it will allow the general public to channel larger amounts into a savings instrument that offers maximum flexibility and high tax efficiency."
When will this happen and what should be done now?
It is important to clarify that at this stage these are only recommendations and not final legislation. Although the Finance Minister is expected to announce the adoption of the report, the legislative process in the Knesset requires several more months, and changes and adjustments are possible along the way, so none of these measures will take effect within the next ten months.
According to the analysis of CPA Tzachi Mane, savers over the age of 50 must re-examine their pension planning to avoid surprises, and at the same time, it is recommended that the general public hurry and utilize investment provident funds up to the currently permitted ceiling to enjoy the benefits of compound interest as early as possible. As CPA Mane concludes: "In the field of pensions and financial savings, those who do not plan their moves in advance are the ones who pay the price in the end. This reform, when it passes into law, will change the rules of the game for the next two decades. Those who are aware of the numbers and prepare now will find themselves in an excellent starting position."
