The cost of living, loans, mortgages, and ongoing expenses are causing more and more Israelis to look at their pension funds and think, "This is my money, maybe I should withdraw some of it." This is precisely why the Capital Market Authority recently announced a series of new directives designed to make it harder to withdraw pension funds early.
From now on, before approving a withdrawal request, institutional bodies will be required to verify that the application was indeed submitted at the saver's initiative, explain to them the financial and insurance implications, and obtain their re-approval.
This decision is not coincidental. It comes following an increase in cases where savers were persuaded to withdraw their pension funds through promises of "available money," without understanding the true cost of the decision. In certain cases, concerns were even raised regarding deception, forgery of documents, and the concealment of essential information, such as the amount of tax to be paid or the harm to pension rights.
However, the main story is not the new directives. The story is what they teach us: Withdrawing pension funds is much more than a momentary financial decision. It could affect the standard of living of the saver and their family for many years.
Pension is Not a Savings Account
Many view the pension fund as savings that can be opened when money is needed. In practice, the pension is intended for a completely different purpose: To replace one's salary on the day work ceases. But it does much more than that. The pension fund also provides financial protection in the event that a person loses their ability to work due to illness or an accident, and in the event of death, it may guarantee a monthly income for family members. Therefore, when funds are withdrawn or savings are halted over time, it is not only the amount remaining for retirement age that is damaged, but also the protections built over years that could be compromised.
This is one of the main reasons why the Capital Market Authority seeks to ensure that every saver fully understands the significance of the decision before signing the withdrawal request.
The Real Price is Much Higher
Suppose you withdrew NIS 100,000 from the pension fund today. It might seem that you gained NIS 100,000, but in practice, you also gave up all the yield that this money could have accumulated over the years. To illustrate, if such an amount remained invested for about 25 years at an average annual return of 4%, it could have grown to approximately NIS 266,000. This means that the damage is reflected not only in the money withdrawn today, but also in the monthly pension payout, which will be lower in the future.
Added to this is sometimes a significant tax liability, when the withdrawal does not meet the exemption conditions set by law. Quite often, savers discover in retrospect that the amount deposited into their account is much lower than what they expected to receive.
The harm does not end at the level of savings. As long as a person continues to deposit into the pension fund, they generally also enjoy insurance coverage in the event of loss of working capacity and, in addition, a survivors' pension for family members in the event of death, according to the insurance track and the fund's regulations.
When deposits into the fund are halted over time, insurance coverage may be damaged, in accordance with the fund's rules. This is precisely the type of information that many discover only when they or their family members need it, and by then it is already too late.
Withdrawing Severance Pay Also Requires Thought
Quite a few employees withdraw their severance pay every time they change workplaces. The money enters the account, and the feeling is that it is a bonus owed to them. However, in practice, severance pay is part of the pension savings. Withdrawing it could reduce the future monthly payout, and in certain cases, also affect the tax benefits that can be received at retirement.
Therefore, even if the withdrawal is legally permissible, it is important to understand its significance before making a decision.
A decision made today can have an effect even 20 years from now. Some assume that if they resume deposits in the future, everything will work out. In practice, it is not always possible to restore the previous situation.
Returning to a pension fund after a prolonged period may involve a waiting period regarding certain medical conditions, according to the fund's rules. In addition, insurance coverage that did not exist at the time an insurance event occurred cannot be restored retroactively.
In simple terms: Even if it is possible to start saving anew, it is not always possible to restore everything lost along the way.
Pause a Moment Before Withdrawing
The move by the Capital Market Authority is not intended to prevent savers from using their money. It is intended to ensure that they understand the significance of the decision before making it.
Before withdrawing pension funds, it is advisable to stop and check: How much tax is expected to be paid? By how much will the future payout be reduced? Will insurance coverage be damaged? And are there other alternatives, such as debt restructuring, a loan on reasonable terms, or using other liquid savings?
Sometimes there is no choice, and withdrawing pension funds is the only solution. But in most cases, it should be the last option considered, not the first.
Because the pension is much more than money waiting for retirement age. It is the salary of the future, and it is also one of the family's most important safety nets when life does not go according to plan.
The author is a retirement planner from the U-First Pension Insurance Agency group.