Knesset Panel Approves Tax Break for Withdrawal of Provident Fund Savings

New rules allow 2 million holders of small, long-standing accounts to remove funds tax-free.

New tax exemptions on provident fund withdrawals were approved by the Knesset Finance Committee Wednesday to encourage the drawing down of inactive accounts.

The new regulations, submitted by the Finance Ministry, will allow provident fund members who made deposits into fund accounts before January 2008 and have an account balance of up to NIS 7,000 on December 31, 2012 to withdraw these funds tax-free until March 31, 2015. Estimates place the number of fund accounts that would qualify for this tax-free withdrawal status at close to 2 million.

The committee also decided that a law would be formulated to allow provident fund members who deposited money into their accounts from 2008 onwards to withdraw their money tax-free. The distinction made between pre- and post-2008 deposits necessitating special legislation for the latter was based on the comments of Finance Ministry legal advisers. MK Haim Katz (Likud) said he would submit the proposed law as a private member's bill to the Knesset. The deputy director of the Finance Ministry's capital market, insurance and savings department, Rajwan Ghrayeb, said his department would support the bill.

Accounts with under NIS 7,000 in provident fund savings that have not been drawn down by 2016 will be charged management fees of NIS 6 per month as part of the new regulations. Management fees of up to 0.3% of account savings will be charged to accounts where the fund has lost contact with the account holder.

More than 2 million provident fund accounts opened before 2008 have less than NIS 7,000 in them and are no longer active, constituting 40% of total provident fund accounts. Despite the large number of such accounts, they only amount to 1.5% of total assets managed by the funds. Until now, holders of these accounts would have to pay a tax rate of 35% to withdraw their funds. By allowing these account holders to withdraw their funds tax-free, the new regulations are intended to lead to the closure of many of these accounts and increase the efficiency of the pension savings system.

The new regulations are part of a broader effort by the Finance Ministry to make it easier for members of the public to locate and withdraw funds in forgotten pension savings accounts. The treasury has already created a special search engine on its website to help individuals locate any accounts opened in their name.

Moran Mayaan