By Danny Newman, Beit Shemesh Branch Manager, Goldfus Insurance
With interest rates remaining low, many people are looking for alternatives to the regular savings options offered through banks.
Towards the end of 2016, a new savings vehicle came onto the market in Israel, called Kupat Gemel LeHashka’a. It is in essence a mutual fund that is offered by either insurance companies or investment houses.
The State of Israel is trying to encourage people to save money for their future, in particular for retirement. As such, a number of incentives have been built into this relatively new investment vehicle, giving it certain advantages over a number of other savings options in Israel.
What are the advantages of a Kupat Gemel LeHashka’a?
- Money is liquid and available to be withdrawn with no penalties at all times.
- Flexibility in being able to save into a Kupat Gemel LeHashka’a either via a monthly deposit, lump sum payments or both.
- As with all short-term to medium-term savings plans in Israel (other than a Keren Hishtalmut), there is capital gains tax (currently 25%) on the profits. The tax is only paid at the time of withdrawing funds.
- One has the ability to either switch investment tracks within the same company, or move the money to another Kupat Gemel LeHashka’a fund in a different company without incurring a tax event. This allows the fund to maximize its compound interest without any extra fees or taxation, until the money is actually withdrawn from the fund.
- Should one choose to keep the money in the fund beyond the age of 60, and then take the money as a monthly annuity, all the profits will be exempt from capital gains tax. Those wishing to withdraw the money after aged 60 as a lump sum will be able to do so with reduced tax on the profits.
- Whilst the rate of interest is not guaranteed, similar investment tracks in other investment vehicles within the companies offering Kupot Gemel LeHashka’a have historically far outperformed the interest rates in regular savings accounts in banks. Though it is important to note that past performances do not guarantee future ones.
Each company that offers a Kupat Gemel Lehashka’a offers various track options, from solid “safer” tracks with low or no exposure to stocks and shares, to those with higher exposure and many other options in between.
What are the management fees?
There are two types of management fees that can be taken by the insurance company or investment house.
- From the money being deposited into the fund each month.
- From the accumulation in the fund each year.Whilst the maximum fees that can be taken are 4% from the deposits and 1.05% from the accumulation, in practice many funds offer much lower fees. The fees via the Kupat Gemel LeHashaka’a are usually lower than many other savings plans with similar returns on the market in Israel. Many of the insurance and investment companies are currently charging no fees on the deposit, and between 0.7% and 1% on the accumulation.
Additional advantages to this savings vehicle are that there are no other fees. No buying or selling fees, and no fees for moving to different tracks within the same company, or in moving to a different company altogether. As mentioned, this lack of fees on switching tracks and companies, allows the fund to continue to compound without extra fees being taken, which occur in some other savings products on the market in Israel.
How much can I pay into a Kupat Gemel Lehashka’a?
As of 2017, each member of a family who has a Teudat Zehut can contribute up to 70,000 NIS in each tax year (1st January to 31st December). Different companies may have different minimum amounts, but even someone wishing to contribute as little as 200 NIS a month, should be able to find a fund able to accept them.
A family with 2 parents and 3 children can open up 5 plans, and contribute up to 350,000 NIS (70,000 NIS x 5) each year.
There is currently talk of increasing the individual limit in the near future, but as of December 2017, this has not yet been confirmed.
An additional benefit applies for those who are selling or have sold a 3rd property. Due to the potential tax issues of owning multiple properties in Israel, one has until 31st December 2017 to deposit up to 2.5 million NIS, or the sale price of the property, the lower of the two, into a Kupat Gemel LeHashka’a, upon providing all the relevant documents from the tax authorities, confirming the sale of the property.
If I am an Atzma’i (self employed), should I save into a Kupat Gemel LeHashka’a?
In most cases, it is advisable to first maximize contributions into a Keren Hishtalmut. Despite the funds being saved into a Keren Hishtalmut being locked in for the first 6 years after originally opening the fund, the money is subject to two tax benefits:
- A tax deductible expense on some of the money being deposited into the Keren Hishtalmut.
- An exemption from Capital Gains Tax, once the fund is 6 years old.
For the tax year of 2017, an Atzma’i can contribute up to 18,240 NIS into a Keren Hishtalmut. One should consider the advantages of first maximizing the contributions to a Keren Hishtalmut and then paying into a Kupat Gemel LeHashka’a.
Are there any similar plans to a Kupat Gemel LeHashka’a for anyone wishing to contribute more than 70,000 NIS?
Yes there are. Most of the insurance companies and investment houses offer similar investment and savings options to those on offer via Kupot Gemel LeHashka’a. In addition, they allow moving in between different investment tracks within the same company without incurring any extra fees, and likewise, the capital gains tax will only be paid upon withdrawing the funds. However these funds will not have the potential tax breaks that a Kupat Gemel Lehashka’a has for those withdrawing money after age 60, and the management fees may be marginally higher.
Can I take a loan against the funds I have in the Kupat Gemel LeHashka’a?
Many of the companies providing a Kupat Gemel LeHashasha’a, will allow one to take a loan of up to 80% of the funds in the policy at preferential rates using the money in the fund as collateral against the loan. Often the interest rates on the loan offered by the companies are more competitive than those offered from the bank or other loan companies.
What if I have US citizenship?
As a Kupat Gemel Lehashka’a is considered to be a provident / mutual fund, those who hold US citizenship, should consult with their US tax professional as to the viability of opening up a fund, and whether or not it may lead to adverse taxation due to PFIC issues.
How can I start a Kupat Gemel LeHashka’a?
You can either go directly to the companies offering them, or you can open them up with an insurance professional.
For more details about opening a Kupat Gemel Lehashka’a, please contact Goldfus Insurance.