Through a long series of reforms in the field of pension savings, the government transferred responsibility for pensions to savers. In other words, only what the saver manages to save during his years of work is what will be available to him during retirement.
In addition, the government gave savers the option of choosing where to manage their money and imposed an obligation on employers to set aside pension savings for them.
The savings are in pension products, which are: pension funds, managers’ insurance and provident funds – which enjoy tax benefits granted by the government to encourage pension savings. Savings are managed by insurance companies (which control pension funds) or investment houses. Today, the saver is entitled to choose both the type of product in which he will save, and the savings manager.
In order to know how to maximize your monthly allowance in retirement, it is first and foremost important to understand the money route from the moment the monthly deposit is deposited from the salary, until the money becomes a monthly allowance at retirement. Along this path, there are factors that the saver can influence in order to maximize savings, and those that he cannot influence.
How is the amount of the allowance determined?
In general, the route taken by pension money can be presented as follows:
1. Monthly deposit from the insured’s salary.
2. Less – the cost of purchasing insurance in case of death and insurance in case of disability.
3. Plus + return that deposited money accumulates over the life of savings.
4. Less /and more -/+ Balance payment of the pension fund.
5. Less – management fees.
Worth = amountof accumulated savings
6. Divide: in the coefficient set by the treasury
Equal = candin which the monthly allowance
The clauses that the saver can influence are 1-3 and 5, and he can try to maximize them.
Clause 4 depends on what happened throughout the year in the pension fund (many people were hurt and died or not) and whether it has a surplus or deficiency because it had to pay the people who were affected. If she has a surplus, she distributes it among all colleagues, and if there is a shortage, it is distributed among all colleagues. In large pension funds, the effect of the surplus or lack is relatively small.
Section 6 is determined by the Ministry of Finance in accordance with life expectancy assumptions and in accordance with assumptions on how much return the money will accumulate from the moment of retirement (pension) until the end of the provision of the allowance.
What can the saver affect and how?
1.Monthly deposit from the insured salary:
In general, the amount of the deposit is determined according to the tax benefits given to it. It consists of three parts:
1) Employer contributions that the employer contributes to the pension fund.
2) Employee contributions that the employee himself contributes to the pension fund.
3) Compensation payments. Compensation is a significant part of the pension fund and may reach up to 40% of the amount of the pension. In other words, withdrawing compensation when switching jobs will reduce the monthly allowance by up to 40%.
Pension contributions are made in different arrangements with different employers, but the common arrangement is:
5% employer payments, 5% employee payments and 8.3% compensation.
A total of 18.3% of the salary collector. The minimum provision is 17.5%.
How can this factor be maximized?
- Insured salary: The amount of the percentage contribution is not determined from the gross salary as it appears on the payslip, but from the salary insured for pension, which may be lower. In other words, it may be that the saver earns NIS 10,000 gross per month, but his insured pension salary is only NIS 7,000 of this, and only from this will the percentage of pension contributions be derived. Therefore, when starting a new job, it is important to make sure that the salary insured for retirement is the gross salary, and if it is lower, to bargain with the employer. In addition, when receiving raises in the workplace, make sure they are from the insured salary, and pension payments will be set aside for them.
- Employee compensation: Even if the percentage of pension contributions in the workplace has been established, you may be able to unilaterally increase the portion of the employee’s payments (without increasing the employer’s payments – for which his consent is required), and still enjoy the tax benefits on the pension provision. You need to find out from the workplace personnel department whether you are taking full advantage of the tax benefits you are entitled to, and whether it is possible to increase the portion of employee payments.
- Compensation: When moving between jobs, withdrawing compensation can dramatically reduce retirement savings. Therefore, attracting compensation should be carefully considered, especially for consumption purposes – renovation, travel abroad, etc.
2. Cost ofpurchasinginsurance
A pension arrangement is actually a package that includes savings and two types of insurance. One insurance in case of death, in which case survivors’ allowance is paid, and a second insurance in case of disability – in which case a disability pension is paid. From the money that the saver contributes to retirement, the insurance is purchased, and their cost (the premium) is subtracted from the amount that goes to savings. That is, the more expensive the insurance, the less money goes into savings.
Howcan thisfactor be maximized?
- Appropriate insurances: Make sure you don’t have unnecessary insurance. For example, singles do not need survivors insurance since they do not have survivors, so the money actually goes to purchase insurance that is not needed. Even older savers, whose children are already independent and have left home, can find it right for them to reduce this insurance. If the saver doesn’t specify anything when joining, he’s attached to a general plan, which may not be right for him.
- Double insurance: It is worthwhile to put life and disability insurance in order. Most people have additional insurance on top of the basic insurance from the pension fund, so it is recommended to make sure that there is no double insurance.
- Cost of insurance: Employees who save on managers’ insurance or provident funds to which insurance is attached, sometimes receive an offer to expand them. It is important to check carefully whether in this case it will not be cheaper to purchase the insurance separately and not as part of the pension instrument.
After the cost of insurance has been paid, the balance of the deposit is transferred to savings. Savings are conducted in the capital market. The funds are invested in a variety of investment instruments – from safe instruments such as short term bonds issued by the State of Israel to risky investments, such as stocks and hedge funds. The riskier the investment, the higher the return the saver will receive for it, but so is the risk on its side. If the saver did not say anything when joining the pension fund, he was added to the general track, which is a default track. In this track, the money is invested in about 30% shares and is not suitable for all savers. However, switching to a different investment mix is possible at any time.
The body that manages the savings charges management fees. Management fees are charged in two forms:
- Management fees from the current deposits that the saver pays every month.
- Management fees from the balance accumulated by the saver to date.
For example, NIS 1,000 is set aside for the saver every month. He has been saving for two years and has NIS 25,000 accumulated (as a reminder, the cost of purchasing insurance was deducted from the original amount of the provision, but the return on the investment of the funds was added over two years).
Management fees from deposits will be taken from the NIS 1,000 set aside each month.
Management fees from the accrual will be taken from the NIS 25,000 saved by the saver so far.
Since the responsibility for pension savings has passed into the hands of the saver, he must be aware of all the points where his choices can affect and increase savings and maximize it. It is important to be aware of all the funds that are set aside, the costs paid from them. It is also important to adjust the savings to the personal situation of the saver, and to the savings horizon that remains before him until retirement.