According to the pension law in Israel, since 2008 every employer is obliged to deposit for his employee’s pension plan.

For those who don’t have an existing active pension fund, the law allows 6 months “deposits free” period, to allow adjustment period. Otherwise, for others who already have a running fund, the employer is obliged to deposit after 3 months period of adjustment, retroactively since day one.

The salary height for pension is the lowest between the salary before extra hours or the average salary in IL (approx. 11K NIS).

Pension deposits are mandatory both for the employer and the employee – the employer is forbidden from disregarding it and the employee is forbidden from renouncing it.

The pension rates are: 6% employee part, 6.5% employer part, 6% employer reimbursement part. In other words, the employer has to pay out of pocket 12.5% for the employee’s pension fund, and to deduct another 6% from the employee salary (total of 18.5% of the salary worth should be deposit for pension).

Pension Tax

The pension is not taxed till retirement age (67). However, if someone wishes to withdraw the funds before reaching the retirement age, a fine tax would apply of 35% flat rate (no brackets apply) on the whole pension (excluding the reimbursement part). In some rare cases the funds could be withdrawn without tax such as 75% disability, severe illness or low incomes.

The reimbursement part is allowed for withdrawal at the termination date of the work relations between the 2 parties.

If the employer deposited 8.33% of the employee’s salaries (according to clause 14), there won’t be any additional payment on his side at the termination of relations date. However, if the employer deposited only 6% (which is the minimum by law) throughout the work period, additional 2.33% times the average salary of each work year should be paid to the employee upon the termination of the work relations.

The law gives the employee a tax exemption of ~12,500 NIS ceiling times his seniority, and the part of salary beyond that ceiling would be taxed according to the marginal rate of this employee (can even reach 47% plus 3% additional high incomes rate).

An employee can file a request to the ITA and ask to withdraw his reimbursements funds even if a significant period of time had past since the termination of relations date. In this case, the tax calculation would be made at the day of the request and therefore it is highly recommended to do so only at a year of low incomes (to avoid marginal tax rate due to high incomes at the year of the withdrawal).