As of January 2017 – Obligatory Pension contributions for the self-employed (Atzmaim)
by Danny Newman, Branch Manager – Beit Shemesh, Goldfus Insurance
Approximately 12.5% of the current work force in Israel (the equivalent of approximately 400,000 people) are self-employed, neither having an enforced contribution to pension savings, nor an employer paying contributions as a regular salaried employee has. The majority of self employed people in Israel have either very minimal or nothing at all in the way of pension savings.
For many self-employed people, the only pension they can expect, is the state pension, known in Hebrew as Kitzbat Zikna. For most individuals, the maximum state pension is in the region of 1,500 NIS per month. With ongoing expenses and increased longevity, many self-employed people who do not have the luxury of personal wealth to fall back on, find themselves facing a significant change in lifestyle, due to a massive decrease in income, once they choose to retire.
In order to bridge the gap, and to ensure that a self-employed person’s financial situation will improve when they choose to retire, as of January 2017, legislation went into force obligating self-employed people to contribute into a pension plan.
Who is obligated to contribute into a pension?
- If you are aged 21 or older and born after 31/12/1961.
- If you are self-employed and not yet reached early retirement age (currently aged 60)
- If you have been working as a self-employed person for a period of more than 6 months.
Can I contribute into a pension if I am younger than 21 or born before 31/12/1961?
Yes. As long as you are old enough to join a pension plan, you are entitled to contribute before reaching 21 as well as if you were born before 31/12/1961. The same applies to being able to contribute within the first 6 months of becoming self employed.
How much am I obligated to contribute?
The income upon which one is obligated to contribute is split into 3 tiers. All of which are based on the Schar Memutza BaMesheq שכר ממוצע במשק – .This is the defined ‘average’ gross salary in Israel. As an indication, the average gross salary for 2016 was 9,464 NIS. For 2017 it is 9,673 NIS (as publicized by Bituach Leumi January 2017 -https://goo.gl/zt7RMI).
The 3 tiers are:
- Half the Schar Memutza BaMesheq.
- The 2nd half of the Schar Memutza BaMesheq.
- Anything above the Schar Memutza BaMesheq.
|Average monthly income (based on January 2017 data*)||Minimum legal contribution (%)||Minimum Legal Contribution (NIS)|
|0 NIS – 4,837 NIS||4.45% of the average monthly income||Up to 215 NIS per month (based on 4,837 NIS x 4.45%)|
|4,837 NIS – 9,673 NIS||4.45 % of income up to 4,837 NIS, and 12.55% of income earned above 4,837 NIS||Up to 822 NIS per month (based on 4,837 NIS x 4.45% and 4,836 NIS x 12.55%))|
|Above 9,673 NIS||8.5% of 9,673 NIS||822 NIS per month|
*For 2018 figures, click here
When do I need to start contributing?
The obligation to contribute started January 2017. However, due to the nature of self-employed people reporting annual earnings, the obligation is based on the tax year. In Israel the Tax year runs from 1st January to 31st December. As such, the obligation for the 2017 tax year is that the contributions must be made by the end of the tax year(. i.e. before 31st December 2017). This will be the case for each subsequent tax year.
Does that mean I can only make a lump sum contribution before the end of the tax year?
No. A self -employed person has the choice of either making monthly payments, a one off payment or periodic payments. The recommendation is however to set up a fixed monthly payment to alleviate cash flow issues that may occur at the end of the tax year. By doing so this will ensure that each person is compliant with the new regulations, as well as guaranteeing that the insurance components that may exist in a pension plan remain in tact. For example, for someone earning on average more than 9,673 NIS each month, it may be easier to contribute 822 NIS per month, instead of having to find a lump sum of 9,864 NIS in December each year.
Does it make any difference if I am classified as an Osek Murshe or Osek Patur?
No. As long as you have income as a self-employed person, you are obligated to pay.
What if I work both as a regular salaried employee and a self-employed person?
You will still be obligated to make contributions on the income you have as a self-employed person.
Can I contribute more than the legal obligatory pension?
Yes. The amounts stipulated in the law are minimum contributions. In order to benefit from a larger pension and increased tax benefits, it is recommended to contribute more where possible. One should consult with an insurance / pension professional as there may be upper limits on certain plans, over which it may not be as tax efficient as other potential avenues.
How do I calculate how much I should be contributing?
You should speak with both your accountant and insurance agent. Your accountant will be able to advise on the annual and monthly income on which your current tax year earnings are likely to be. Your insurance agent will then be able to ensure that the appropriate plans are set up with the correct contributions to ensure that you are compliant.
How do I start contributing?
If you don’t already have a pension plan that can receive these funds, you will have to open up one of 3 pension plans.
- A Keren Pensia – Pension Fund
- A Bituach Menahalim – Managers Insurance Policy
- A Kupat Gemel – Pension provident Fund
Each type of pension plan has their own benefits which should be discussed with your insurance agent.
What happens if I do not contribute to the pension plan?
Should your average monthly income be higher than minimum wage, failing to contribute into a pension fund will leave you exposed to fines and penalties.
After filing your annual returns, the tax authorities will be able to gauge whether or not you have deposited the appropriate funds into your pension plan. You will then be sent a notice of how much you need to pay into your pension plan. You will then need to pay at least the amount listed in the notification with a date by which the payment will need to be made. You will also have to send proof of payment in to the fund to the relevant authorities.
Failure to do so can lead to a 500 NIS fine. In addition to this, you could lose a tax deductible expense of up to twice the amount you would have received had you made the contributions.
Are there any other benefits to the obligatory pension plan for self-employed people?
Yes, the government has ensured that certain benefits that the self-employed workforce were lacking, have now been improved.
- Bituach Leumi (National Insurance) contributions have been lowered for income levels up to 5,679 NIS per month from 6.72% to 2.87%. For any income over this level, the contributions to Bituach Leumi have been increased from 11.23% to 12.83%. This means that for the majority of self-employed people (excluding very high earners), the amount being paid to Bituach Leumi is lower as of January 2017.
- Mas Hachnasa. The maximum pension contributions for tax deductible purposes have been increased from 16% to 16.5% of one’s income, meaning that there is an ability to receive a greater tax deduction or rebate for the tax authorities, enabling one to contribute more than they were able to do so previously.
- Unemployment. Should a self employed person either retire or close their business, they will be able to withdraw up to 1/3 of the funds accumulated in the fund, or according to a formula of monthly income multiplied by the number of years worked. The amount that will be allowed to be withdrawn will be up to the maximum tax exemption for withdrawing Pitzuim, which currently stands at 12,230 NIS per year. Although, withdrawing funds from the pension plan will reduce one’s future pension.
- Keren Hishtalmut. The tax benefits for contributions to a Keren Hishtalmut have been adjusted slightly, meaning that the initial 4.5% of contributions of an annual income up to 260,000 NIS count as a tax deductible expense. This is opposed to the 4.5% previously only starting after an initial tier of 2.5% of a self-employed person’s annual income. This enables those who were previously contributing less than 7% of their annual earnings into a Keren Hishtalmut to receive larger tax rebates.
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