2016’s New Savings Vehicle
The rate of change in Israel’s savings and investment environment almost matches the frequency of elections and the underlying instability of the region. Every 2-3 years new rules and regulations are promulgated and new savings and investment products are introduced. Typically, the various governments in power employ a trial-and-error approach, with the law of unintended consequences shining brightly in the rear-view mirror.
A potential example of this was the emasculation of provident funds, a popular savings vehicle almost a decade ago. Provident funds were savings accounts suitable for longer term tax-free savings, investment for minors, and supplementary retirement funds. When in 2008, new rules removed their attractiveness, investors diverted these funds into real estate investment, further fueling the bubbling market.
Now, the Government, is soft pedaling back on this reform from 2008, with the re-introduction of the familiar provident fund with some new frills. A provident fund is a collective investment vehicle similar to a mutual fund, investing a wide range of assets (stocks, bonds etc), but have tax advantages on the deposit and on the profits, but crucially cannot be redeemed without penalties until retirement.
The new version of provident funds, “Investment Provident Funds”, will most likely invest in similar investment options, but crucially allow for redemption at any point without onerous penalties. However, if redeemed prior to age 60, ordinary capital gains tax will apply. This allows for the Government to remain true to its goal of encouraging retirement savings, while not overly penalizing redemption. In a worst-case scenario of early redemption, the saver will have at least achieved a benefit of deferring taxes, while paying ordinary capital gains tax. Further, partial redemptions are allowed and I would expect the investment houses to readily offer loans against funds for savers interested in safeguarding capital gains from taxes.
In any event, this new product, when formally launched this year, is a welcome addition, and brings back a much-needed vehicle for tax efficiency.
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