Saving Plus - an Investment Provident Fund
In recent years, a revolution has taken place in the field of savings in Israel, led by the return of provident funds to the forefront through the “Investment Provident Fund”, and the “Savings for Every Child” program launched by the Ministry of Finance with the aim of encouraging parents to save for the long term for their children.
A savings revolution: Investment Provident Fund
In November 2016, the Ministry of Finance launched a new and attractive savings product – the “Investment Provident Fund”), which revived public interest in provident funds. An Investment Provident Fund is a savings instrument similar to traditional provident funds – meaning that the funds deposited therein are managed by a professional investment manager in an investment track suited to your profile (equity, solid, or a combination thereof), but with a bonus – the funds accumulated in the fund may be withdrawn at any time1 and at any age as a lump sum without paying a “penalty” for early redemption as in traditional funds.
One of the central advantages of an Investment Provident Fund is the possibility to withdraw the funds accumulated in the fund as a monthly annuity after the age of 60. Withdrawal as an annuity is recognized as exempt from capital gains tax, and is received through the transfer of the funds to a pension product (usually a pension fund or a managers’ insurance policy). It should be noted that withdrawal as a lump sum (capital withdrawal) will be subject to capital gains tax in accordance with the law.
In simple terms, what is an Investment Provident Fund?
An Investment Provident Fund is a savings and investment vehicle intended for the general public, allowing investment of funds in the capital market across a variety of tracks at different risk levels, to which deposits may be made starting from the first shekel and up to a ceiling of ILS 83,641.092 per person per year.
Another advantage of the Investment Provident Fund is its high liquidity, allowing withdrawal of the funds at any time (subject to payment of capital gains tax), alongside the possibility of switching between different investment tracks without a tax event. In addition, the product offers unique tax benefits for those who choose to withdraw the funds as an annuity after the age of 60. This combination of flexibility, professional management, and potential for return makes the Investment Provident Fund an attractive solution for medium- to long-term savings.
Savings for Every Child Program
The “Savings for Every Child” program is an initiative of the State of Israel, launched in 2017 with the aim of enabling every child in Israel to begin his adult life with an initial savings amount. Under the program, parents are required to choose where the savings funds for their children will be managed.
There are two main alternatives for the purpose of this matter. The first alternative is an Investment Provident Fund. Under this option, the funds are invested in the capital market in various tracks according to the choice of the parents (solid, general, equity, etc.), with the possibility to switch freely between investment tracks over time.
Investment management is performed by an institutional body, insurance company, or investment house, at the choice of the parents. Another alternative is management of the funds through a bank deposit. The money is deposited at a fixed or variable interest rate, according to the terms of the bank, and there is no exposure whatsoever to the capital market. Under this alternative, it is not possible to choose investment tracks or change the level of risk over the years. Accordingly, the potential return over time is also usually lower. The choice between the alternatives depends on the personal preferences of each parent and the desired savings characteristics. A bank deposit is characterized by a low level of risk and relative stability, while an Investment Provident Fund provides exposure to the capital market and therefore may offer higher potential return over time, alongside volatility. The choice between the alternatives should be made according to the personal considerations of each family.
