Pension insurance for a self-employed person (Israel)

A self-employed person (osek murshe or osek patur) must independently deposit sums of money for pension savings, at the rates detailed in this article, until the end of the tax year

A self-employed worker is entitled to tax benefits for self-employed deposits for pension insurance

A self-employed person may deposit additional amounts for pension insurance beyond the amounts set by law, thus increasing his pension savings and pension allowance as well as benefiting from additional tax benefits

The minimum deposit rate for pension insurance

• For a part of the income that is up to half of the average salary in the economy (i.e. for the first NIS 71,220 in the tax year) 4.45% of the income must be deposited.

• For the rest of the income up to the average salary in the economy (i.e. up to NIS 142,440 per year) - 12.55% must be deposited.

• For the part of the income above the average salary (i.e. for every shekel above NIS 142,440 per year) - there is no obligation to deposit for pension insurance. Self-employed persons who wish to increase their pension savings may set aside this part of their salary for pension insurance as well.

• These rates will be calculated from the self-employed person's income after deducting from it the deductions permitted by law, and before deducting from it the deductions due to a deposit to a training fund, pension insurance or another provident fund for annuity.

Examples of the amount of deposits for pension insurance

• A self-employed person whose annual income is NIS 96,000 (an average of NIS 8,000 per month) (after deductions for recognized expenses and before deductions for contributions to provident funds and education funds):

• A self-employed person whose annual income is NIS 180,000 (an average of NIS 15,000 per month) (after deductions for recognized expenses and before deductions for contributions to provident funds and education funds):

• A self-employed person whose annual income is NIS 180,000 (an average of NIS 15,000 per month) (after deductions for recognized expenses and before deductions for contributions to provident funds and education funds) and who wants to receive maximum tax benefits for deposits (of a maximum of 16.5% of income up to the ceiling set by law)

Self-employed who is also an employee at the same time

• A self-employed person who is employed at the same time as an employee at a certain workplace must contribute to the pension insurance himself, only if the amount set aside for him as an employee (the employer's contributions and the employee's contributions) is lower than the amount he must set aside as a self-employed person for his income from the business, and up to this amount.

Example

If the income of a self-employed person from the business requires a provision of NIS 5,000 for the pension insurance, and as part of his work as an employee the employer's contributions and the employee's contributions amount to NIS 4,000, he must deposit another NIS 1,000 as a self-employed person. If, as part of his work as an employee, the contributions of the employee and the employer exceed NIS 5,000, he is not required to deposit any amount for the pension insurance as a self-employed person.

Target population and prerequisites

• An independent worker who meets the following two conditions:

  1. He is between the ages of 21-60.

  2. He is registered as a value-added tax practitioner for at least 6 months.

• Despite this, a self-employed worker whose age on 01.01.2017 was 55 years or older is exempt from pension savings deposits.

The steps of the procedure

• You must contact one of the pension entities (pension funds, insurance companies or provident funds) where you can manage your pension savings, to open a savings account.

• You must choose the type of pension insurance ( pension fund, executive insurance or provident fund ) as well as the savings route in which the funds will be invested.

• Several forms must be filled out, which mainly include the insured's personal details as well as a letter of authorization to deduct the funds from the bank account.

• The insured may be required to provide medical information about his condition and even provide the pension body with medical documents ( underwriting procedure ).

• The deposits can be made at any time during the year. You can make multiple deposits or a one-time deposit. (Since in many cases self-employed workers can only verify the amount of their annual income near the end of the tax year, they may prefer to make a one-time deposit at the end of the year, then they will be able to know the amount of the required deposit).

• The contributions to the pension insurance must be made by the end of the tax year in which the payments are made.

• For information on the deposit procedure and the method of deposits, see independent deposits for pension insurance.

Violation of the obligation to deposit funds for pension insurance

• Beginning with the 2018 tax year, fines can be imposed on self-employed individuals whose income exceeds NIS 66,861 per year (as of 2023) and who have not deposited the amounts and rates stipulated by law into the pension insurance.

• Before imposing the fine, the centre for the collection of fines will send a notice to those self-employed included in the list, according to which if they do not deposit within 90 days the legally deficient contributions to the pension insurance, they will be fined.

• A fine of 500 NIS will be imposed on self-employed persons who received a warning and nevertheless did not deposit the amounts required for the pension insurance (the amount will be updated annually according to the index change rate).

• The fines will be imposed as of December 1, 2019, due to the 2018 tax year.

Tax benefits for the self-employed who deposited funds for pension insurance

• A self-employed person is entitled to tax benefits on pension insurance deposits.

• Tax benefits are also given for deposits in amounts and rates higher than the minimum deposit rates listed above.

• You can receive tax benefits for deposits of a maximum of 16.5% of income up to the ceiling set by law.

• The benefits will be given only for the year in which the funds were actually deposited for the pension insurance. That is why it is important to make sure that the funds reach the pension body where the pension savings are conducted before the end of December.

• For more information, see income tax benefits for independent deposits for pension insurance.

pay attention

The deposit for pension insurance does not affect eligibility for a work grant

• The deposit does not reduce the amount of income for eligibility for the grant.

  • Those whose income before the pension insurance deposit was too high and therefore were not entitled to the grant, will not be able to benefit from the grant by making a pension insurance deposit.

  • For more information, see Work grant (income grant, negative income tax) (in the paragraph "Incomes that affect eligibility for the grant").

The reduction of payments to the National Insurance due to independent deposits for the pension insurance

• Independent deposits for pension insurance may reduce the amount of "taxable income" for payments to the National Insurance Institute.

• A self-employed person who deposited sums for pension insurance and chose to receive a "deduction" benefit for them (up to the qualifying ceiling), will also benefit from a reduction in the amount of the National Insurance premiums and health insurance premiums at a rate that can reach 17.83% of the amount deposited for the pension insurance and recognized for the income tax deduction benefit.

• For more information, see income tax benefits for self-employed deposits for pension insurance (in the paragraph "The effect of the deposit for pension insurance on the payments to the National Insurance").

Withdrawal of funds in unemployment situations

• During the year 2021, a self-employed person who deposited funds for pension savings by the law, could withdraw certain amounts from the pension savings, in any of the following situations:

  • The independent closed the business.

  • The self-employed person has reached retirement age and has no income that is required to contribute to pension insurance.

  • The self-employed person stopped practicing his profession.

  • The self-employed person closed his business for a cumulative period of at least one month during the years 2020-2021 due to restrictions placed on opening businesses during the corona crisis (according to the law on special powers to deal with the corona virus ).

• For more information, see withdrawing funds from the pension insurance or provident fund for a self-employed person who has closed his business or stopped practicing his profession .

Important Information

• A self-employed person may deposit additional amounts for pension insurance beyond the amounts stipulated by law, and thus increase his pension savings (and the pension allowance ) and enjoy additional tax benefits.

• It is important to find out the terms of the pension insurance, including the amount of the management fees that the pension body collects from the savers. In some cases, it is possible to negotiate the amount of the management fee.

• It is important to choose the investment channel in which the funds that the saver deposits into the fund will be invested. For more information, see the selection of the investment route of the pension insurance funds .

• In addition, a self-employed person may deposit payments to a training fund for the self-employed, and enjoy additional tax benefits. For more information, see the Self-Employed Training Fund.

What is the most popular pension fund in Israel?

Some popular pension funds in Israel include:

• Altshuler Shaham

• Migdal Makefet

• Meitav

• Phoenix

If you are in Altshuler Shaham, they will provide you with details on how to send money and after every transfer, you need to send an email to sherut@altshul.co.il with this information:

• Screenshot of transfer from your bank

• and email like this:

  ```plaintext היי!

אני, [NAME SURNAME]:

תז: [ID]

סכום: [SUM[ שקלים

לשנת [YEAR] כולה, ב-[sum per month] שקלים לחודש

תודה ```