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A few questions arise:
- Are you obliged to contribute to your pension?
- What are the tax advantages for self-employed people who pay pension contributions in Israel?
- What happens if you don't contribute to your pension?ALSO READ: What are the advantages of contributing to pensions when you are self-employed in Israel?
Since 2008, all employers have been required by law to make pension contributions for their employees. This is the mandatory retirement (פנסיית חובה) with a minimum contribution amount. The aim is to guarantee employees a decent retirement.
This provision does not include self-employed workers in Israel, who nevertheless represent 12% of the working population.
So, given the low contributions among the self-employed in Israel, the government felt the need to address this issue to prevent them from becoming a burden when they reach retirement age.
From January 2017, self-employed workers in Israel are therefore obliged to save for retirement.
Compulsory contributions, yes, but under what conditions?
- A self-employed person in Israel is obliged to make pension contributions if the following conditions are met:
- Any self-employed person over the age of 21.
- A self-employed person who has held this status for more than 6 months.
- A self-employed person under 55.
- If you answered "yes" to all these questions, you are obliged to contribute to your pension.
How much do I have to contribute?
A freelancer in Israel, whether ossek patour or ossek mourchéis required to contribute according to the amount of his income in accordance with the following percentages: (amounts are valid for the year 2023)
- Up to a monthly income of 5,935 shekels, the percentage contributed for retirement is 4,45% of income.
- For a monthly income of 11,870 shekels, the percentage contributed for retirement is 12,55% of income.
- Above a monthly income of 11,870 shekels, you are not required to contribute more than 12,55%. However, the self-employed person may choose to contribute more in order to benefit from tax advantages and contribution allowances.
When should I start contributing?
The self-employed person must start contributing to his pension during the tax year. Contributions can be made monthly, or a deposit can be made once a year.
To optimize "cumulative interest", it is advisable to start as early in the year as possibleto make your money work for you as long as possible.
How do I know in advance how much to contribute?
Many self-employed people find it difficult to know in advance how much they will earn over the course of the year, and are therefore unable to correctly estimate the contributions they need to make.
Here are a few solutions that can help you overcome this problem:
- Contribute a few hundred shekels monthly or quarterly. At the end of the tax year, all you have to do is make up the shortfall according to your income or your accountant's recommendation.
- Contribute monthly or quarterly, depending on your estimated annual income. At the end of the tax year, all you have to do is make up the shortfall according to your actual income.
- Many pension funds allow you to contribute the full amount at once, just once a year.
However, there are two things to bear in mind:
- Do you have the cash flow you need to deposit the full amount of the annual fee in one go?
- Make sure that you don't lose your insurance cover or the continuity of your contribution capital rights.
Here are a few examples to help you understand:
- 1. Mr Cohen has an Ossek Mourché.
- He earns 6,000 Nis per month: he will therefore have to contribute (5,935 *4.45% + (6000 - 5935) * 12.55% = 272 Nis per month.
- 2. Mr Lévy earns 12,000 Nis per month: he will therefore have to contribute (5935 *4.45% + (11870 - 5935) * 12.55% = 1009 Nis per month. (It is not compulsory to contribute above the average monthly salary. However, it is strongly recommended).
- 3. Mrs Cohen earns 4,500 Nis a month: she will not be obliged to contribute as she earns less than half the average wage in Israel.
- It is important to specify that these amounts are the minimum contributions required by law.
You can, of course, contribute as much as you like, up to the minimum limit allowed by law.
Are there any advantages to contributing for retirement?
Yes, the government encourages savers through substantial tax benefits, thus ensuring a return on savings.
Retirement savings also include insurance in the event of disability or death.ALSO READ: What are the advantages of contributing to pensions when you are self-employed in Israel?
What will happen to those who don't contribute?
Self-employed workers who fail to save for their retirement under the compulsory pension scheme can be fined up to 500 Shekels.ALSO READ: Retirement in Israel - How does it work?
Your questions - Our advice :
- What about shareholders who pay themselves salaries but do not contribute to their pensions? Will they be subject to the same constraints as self-employed workers?
- How do we know what profit we'll have when we're in the middle of the year? How much will we have to contribute?
- I'm self-employed but also an employee. Do I have to contribute to my pension as a self-employed worker?
- Retirement is a complex area, with many parameters to take into account. And it becomes even more complex if the Israeli tax authorities gets involved. It is therefore advisable to consult Israeli tax specialists.
