Amid the welter of declarations by ministers about additional budgets for their ministries and other bonbons for the public, the government has approved an item in the state budget that will hurt pension savers. To offset higher budget spending, the government cancelled the raising of the ceiling for pensioners’ tax-free income. The result will be hundreds of shekels monthly taken from pension payments.
In 2008, as part of the agreements in connection with the switch from lump sum pensions to monthly payments, the Ministry of Finance, the Histadrut (General Federation of Labor in Israel) and the employers agreed a limited tax exemption for pension savers. It was decided that salaried workers would receive a tax benefit on a proportion of their monthly payments.
The exemption stemmed from the desire of the state to encourage long-term saving and retention of money in pension schemes until retirement. The Income Tax Ordinance was amended (amendment 190), setting out rules for receiving a tax exemption on a "qualifying allowance".
At first, the ceiling for the exemption was set at 35%, but it was later raised, and now stands at 52%. It was also agreed that the ceiling would continue to be raised until it reached 67% starting from 2025. This will not now happen. Under the heading "Halting the growth in the tax benefit on drawing a pension allowance in 2025", a provision was introduced into the budget that will stop the exemption ceiling from being raised further.
The maximum qualifying pension for a tax exemption is NIS 9,120 monthly, and the maximum exempt amount is currently 52% of this, or NIS 4,742. The exempt amount was to have grown to NIS 6,110 from 2025.
The state argues that "this exemption is retrogressive and in practice serves only those with high pension allowances… since at present there are hardly any pensioners in the new pension funds whose allowance is high enough to benefit from this exemption, those who do benefit from it are almost exclusively pensioners with an unfunded pension or in pension arrangements of the old pension funds."
According to tax experts, the freezing of the ceiling means the imposition of a tax of between NIS 1,000 and NIS 1,500 on the public’s pensions. Tax consultant Shahar Shabi explains: "The state’s original plan was to encourage workers not to withdraw the severance pay provision element during their working lives and to leave these amounts within the pension fund to be drawn in the future. The means of persuasion was the granting of a tax exemption on part of the expected pension allowance. The exemption was supposed to be up to 67% of the ceiling set for the pension, and now they are trying to change that and limit it to 52%. How much of a hit this will be varies from one person to another, but it would appear that the average will be about NIS 1,000."
The Ministry of Finance estimates that the measure will save NIS 700 million a year from 2025. As Shay Porat CPA, director of regulation and payroll accounting Har-Gal, puts it: "This is NIS 700 million that those who retire on pensions will pay in tax. The upshot is that on every pension payment we will pay 15% more tax. For someone entitled to the full exemption, on a monthly pension of NIS 9,000, this will amount to over NIS 1,000 more tax monthly."
Despite what the Ministry of Finance says, the effect will not just be on those with high pensions, but across the board, at different rates. Nevertheless, the Histadrut has yet to make its voice heard. Its response to our enquiries was that "we are studying the matter."
In other circumstances the Histadrut might have responded more forcefully to a hit to workers’ pensions, but now, when negotiations on a pay agreement for public sector workers are underway, the workers’ organization is in no hurry to upset the applecart.
Published by Globes, Israel business news - en.globes.co.il - on February 27, 2023.
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