Employees whose retirement savings are made through provident funds will be harmed by implementation of the Ben-Bassat committee recommendations. This is in spite of the committee's declaration that the reform is designed to encourage pension savings. These findings were revealed by a study of the reform's items.
Until now, those saving for retirement through provident funds could withdraw their money at retirement age without paying tax on it, including both profits and employer contributions.
Employees saving for retirement through provident fund retirement plans will be able to choose a number of ways to withdraw their money. They may withdraw it in a lump sum, or at several different times, or in equal monthly amounts, until the fund is exhausted.
In contrast to pension funds and directors insurance plans, provident retirement funds do not include an insurance component (for one thing, the Ministry of Finance forbids it), and their member therefore do not have the option of drawing a lifelong pension.
According to the Ben-Bassat committee recommendations, only employees whose retirement savings are in pension funds and insurance plans that allow policy holders to receive a lifelong monthly pension will continue to enjoy tax benefits after the reform is implemented. These benefits include tax exemptions on profits and employer contributions, up to the ceiling determine by the law.
In contrast, the hundreds of thousands of employees with retirement savings in provident funds are subject to tax upon retirement, both on profits accumulated after January 1, 2000 and before retirement and on employer contributions accumulated during the same period.
The Income Tax Authority will allow these employees to reduce their tax obligation through spreading out the payments over a period of up to six years, as is currently allowed for other one-time payments received by employees upon retirement, such as redemption of extra work days and vacation pay.
The Ben-Bassat committee is attempting, through taxing of provident funds for retirement, to encourage employees to save through pension plans granting a lifelong monthly pension. The banks fear that this decision is liable to destroy the provident retirement funds sector.
Published by Israel's Business Arena on May 18, 2000