After nearly a year of logjam in the Knesset committees amidst frenetic lobbying activities by the banks and insurance companies, the new Provident Fund for Investment has been formally launched in Israel. It is somewhat similar to the American Roth IRA in that it allows for investment of “after-tax” money along with tax benefits if held to retirement, but it also provides a solution for child savings as well.
The Provident Fund for Investment (PFI) allows savers to deposit up to 70,000 shekels per year into a provident fund and is designed to entice additional retirement savings. A provident fund is a collective investment vehicle that earns interest, dividends and capital gains free of tax that until now was only withdrawable at retirement without onerous penalties. This new type of provident fund allows for withdrawal at any point in time, but with the payment of 25% capital gains tax that would have been paid in any event on ordinary savings. However if the saver can hold off until retirement age, the provident fund can be withdrawn tax-free as an annuity.
The new Provident Fund for Investment is similar to traditional provident funds in that there are a myriad of investment objective options that a saver can choose, from conservative to aggressive. Moreover, switching between investment objectives is not a taxable event and typically there are no switching costs. A compelling feature is the ability to switch between provident fund managers without incurring tax liability. This is a core advantage over the current insurance company saving policy product whereby a saver is compelled to sell his or her policy in order to switch to a better performing investment manager. A second key advantage over the insurance company product is the lower management fees versus the insurance company saving policy product which typically costs 1.2% annually.
This new product also finally provides a sensible way for gifting to grandchildren and investing bar/bat mitzvah gifts. The child’s name can be entered as the account holder with a “custodian” family member and the funds can be invested in more attractive alternatives.
In summary, the PFI funds provide a compelling opportunity for savers, seeking to alleviate the tax burden, with the worst case being a deferral of taxes and reinvesting profits, and the best case the funds being used for retirement and pulled out tax-free.