Or Patreanu Investment provident funds have become one of the most popular pension savings tools in Israel in recent years. In 2022, there will already be close to a million active investment provident fund accounts, with managed assets of over NIS 50 billion.
What causes the great popularity of this pension product, even though it is relatively new compared to other pension savings instruments? There are several prominent reasons for this:
1. Flexibility and liquidity
One of the main reasons is that investment provident funds offer much higher flexibility and liquidity than other pension savings products such as pension funds. Unlike pension funds that “lock” the savings until retirement age, in an investment provident fund you can deposit and withdraw the funds at any time without penalties.
This advantage provides savers more control over their savings. For example, if a worthwhile investment opportunity or an unexpected expense arises, you can simply withdraw money from the bank. And vice versa – if there is excess cash, you can easily increase the monthly deposit and thus increase the total savings.
2. Suitable for a variety of savings ranges
Unlike other pension products, which are mainly intended for long-term savings until retirement, an investment provident fund can be used for a variety of savings periods – from a short period of a few years to decades and even until retirement.
This makes the provident fund an attractive investment both for young people who want to keep money aside for buying an apartment or going on a long trip, and for older people who are saving for retirement.
This savings product is also popular among many parents because they can open provident funds for their children to give them a handsome capital when they reach adulthood or for significant events.
3. Supplementary savings for retirement
For older savers, an investment provident fund is an excellent savings tool to supplement the pension gaps. As we know, the level of pension savings in Israel is still low compared to other developed countries, and the pensions of many Israeli retirees are very low.
An investment provident fund makes it possible to deposit significant additional savings amounts each year (up to NIS 79,005 as of 2024) to significantly improve the standard of living after retirement. So even those who did not manage to save enough in their youth can “fill in the gaps” through an investment provident fund.
4. Attractive tax benefits
And how can we not talk about the tax benefits?
An investment provident fund offers a number of tax benefits which also contribute to its growing popularity:
Exemption from tax on the real profits accumulated in the fund in case of withdrawal as a monthly annuity after the age of 60.
Possibility of offsetting losses of securities in the cash register against capital gains from other financial assets.
Exemption from appreciation tax and property tax on savings funds in the cash register.
Possibility to move the cash register between different administrative bodies without paying tax on the profits.
In addition, according to existing regulations, the maximum management fee rate for managing an investment provident fund is 1.05% – this is a significantly lower rate than fees used in other financial savings products such as executive insurance or a financial policy.
And there are also some other factors
Other factors that contribute to the popularity of provident funds for investment include the relatively low interest rates on loans from the funds of the fund (sometimes even prime minus 0.5%), the flexibility in switching between investment routes without paying tax, as well as the wider leverage and diversification options in investments through the fund compared to personal accounts.
In addition, the reforms in the capital market in Israel in recent years have greatly contributed to the popularity of investment provident funds. In particular, it is possible to point out the transition to direct commission management fees instead of indirect management commissions, and the duty of full disclosure and transparency regarding returns and the level of risk of all investment avenues in the provident funds. These changes greatly improved the competitiveness between the camel companies and the ability of consumers to compare the products and their performance with great accuracy.
Some argue that in a period of zero interest rates on deposits and bonds as we experienced until recently, investment provident funds gradually became the “default” for a broad public of savers and investors looking for investment alternatives with a higher return potential in relation to the risk. That is, they have become a basic financial tool to “let money work” instead of simply putting it in deposits that yield very little.
A savings and investment product that is suitable for (almost) everyone
In the end, the conclusion is that provident funds for investment have become such a popular pension product because they offer an adequate response to the changing needs of diverse populations in Israel and especially for the young and dynamic public who are looking for maximum flexibility, tighter personal control over their savings, high liquidity, and wider opportunities for obtaining excess returns through active investment.
However, it is important to remember that an investment provident fund is a savings product that has significant effects on your financial situation. That is why it is recommended to consult with an expert financial advisor who will help you create an excellent investment portfolio that fits exactly your unique needs and characteristics. A professional and skilled financial advisor will examine a variety of personal parameters, your goals for the future and the current market conditions and create together with you a personal financial map that includes an allocation for investments, savings and ongoing financial management that suits you now and in the future.
The financial experts of the wise company are available for you to advise and optimal financial management that works for you. Leave details or contact us and one of our financial advisors will be happy to assist you.
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