Treasury seeks to curb pension tax benefit

The Ministry of Finance has introduced a series of radical measures aimed at reducing the fiscal deficit to 4% next year. Among these measures is the imposition of taxes on advanced training funds, which until now have mainly been a tax-free savings program. The Ministry stated in its explanation of this step that the state preferred to encourage long-term saving through retirement funds, and for this purpose granted tax benefits amounting to 24 billion shekels annually. But in the same budget document, the Treasury proposes to cut the tax benefits promised to pension savers.

There are currently several tax advantages to retirement savings. There are benefits for employers and employees on deposits in pension funds; During the accumulation phase, retirement savings are exempt from capital gains tax; In the withdrawal phase, partial relief is granted on pension payments. In 2024, 52% of the amount due in the monthly retirement payment (currently up to NIS 9,430) will be exempt from income tax. Under a commitment made by the Finance Ministry more than a decade ago, the ratio is set to rise to 67% in 2025. The Finance Ministry is now seeking to reverse this increase.

Until 2012, the tax benefit was 35% of the amount due. Starting in 2012, in order to encourage retirement saving, it was decided to gradually increase the percentage to 67% by 2025.

How will canceling this obligation affect retirees? According to calculations by retirement planning expert Ron Keshet, on a monthly pension of 10,000 shekels, the additional tax would be 192 shekels, or 2,298 shekels annually. On a pension of between NIS 20,000 and NIS 45,000 per month, the additional tax would be NIS 5,746 per year.

“Hundreds of thousands of people will have to adjust their retirement plans,” Keshet says. “The damage is enormous. Some of the damage cannot be seen in normal tables and calculations, because many people do not fall into the normal categories.”

Keshet provides a real-life example of the kind of difficulty that can arise. “A person came to me who could receive a pension of 14,000 shekels per month. Since I know that they have a large income from real estate and other sources, I recommended that he reduce the pension amount to 6,000 shekels and withdraw the remaining balance of the pension.” More than one million shekels as a lump sum of cash, which was supposed to save him 350 thousand shekels in taxes, but if he knew that the Ministry of Finance planned to spoil the plan, he would not be able to withdraw the cash without paying. High tax rate, he would have instead taken a monthly payment of NIS 14,000 and not been stuck with a NIS 6,000 pension. This is a life-changing difference. Now it’s stuck, because once you fill out the forms, your rights are fixed. “The damage to people is a lot of money.”

What difference will the change make in state revenues? According to estimates by the Ministry of Finance, this project is expected to bring in an additional amount of 400 million shekels as of 2025.

As with the proposal to impose a tax on advanced training funds, Histadrut (Israel’s general labor federation) head Arnon Bar-David announced that he would not allow the tax benefits on pensions to be reduced. The Ministry of Finance has previously tried several times to reduce pension benefits without success. It remains unclear whether the ministry is intent on pushing through the measure during this time, or whether the proposal is a bargaining chip that must be abandoned in negotiations with the Histadrut on other matters, such as a freeze on public sector wages.

Published by Globes, Israel Business News – en.globes.co.il – on September 25, 2024.

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