The Child Savings Plan: Where Should You Invest It?

The government program is moving forward and letters are being sent to parents informing them of their choices. Where should you deposit the money? How much tax will you pay? What happens if you don’t make decisions in time?

Parents have several options how to invest their children's savings.
Banks, including Bank Hapoalim, are shifting credit away from business lending.

The government’s Savings Plan for Every Child program is underway.

The National Insurance Institute is sending letters to all qualifying parents asking them to decide where this savings account will be deposited and managed.

Under the plan, every child up to age 18 will get 50 shekels ($13) a month deposited by the government in a special savings account in the child’s name, above and beyond any child allowance already being paid by the state.

If parents wish, they may add to this sum by another 50 shekels a month, although this will be subtracted from the monthly child allowance. When the child reaches age 18, he or she will also receive a lump sum of 500 shekels. And if he maintains the savings account until age 21, he will receive another lump sum of 500 shekels.

Parents can choose to have the money deposited in one of 12 provident funds (kupot gemel), or in a bank account at one of nine banks.

Some 320,000 children have already been enrolled in the Savings for Every Child program, Finance Minister Moshe Kahlon said earlier this month.

Kahlon said the parents of 210,000 of these children have chosen to have the money invested in a provident fund. The rest have opted for a bank savings plan. The great majority of parents have decided to add 50 shekels monthly to the deposit.

“No matter what you choose, the important thing is to make a good choice for your children’s future,” Kahlon said in the Facebook posting.

Here is some advice about how to do that.

What investment tracks are offered as part of the Savings Plan for Every Child?

For those who choose to save via a provident fund, there are five different investment tracks: low risk, medium risk, high risk, halakhic and Sharia-based.

Those who choose to put the savings in a bank account can choose from the following three options:

Fixed interest, unlinked: In this track, the yearly interest for the savings period is fixed from the start and does not change throughout the period.

Variable, prime-linked interest: In this track, the yearly interest is determined as a spread of the prime interest rate (Bank of Israel interest + 1.5 percentage points) and varies whenever there is a change in the prime rate.

Fixed interest, inflation-linked: In this track the yearly interest is fixed and linked to changes in the Consumer Price Index.

What about the old switcheroo

Can you switch tracks?

Savings that are in a provident fund can be moved between investment tracks without this being considered a taxable event. However, if the savings go into a bank account, the track cannot be switched.

Can you switch between a bank savings account and a provident fund?

No. Once the decision is made, there can be no switching between a provident fund and a bank savings plan.

Which is better – a bank savings plan or a provident fund?

A bank savings plan offers a guaranteed return that is relatively low but safe. With a provident fund, the fund manager will design an investment plan as it sees fit. So the choice depends on the length of the savings period. The basic rule of thumb is that the longer the investment term, the better it is to invest in higher-risk assets to earn a greater return. In other words, put the money into a provident fund.

What happens if the parents don’t choose which investment track to deposit the money in, or aren’t interested in joining the program?

If parents don’t indicate a choice, the government will automatically deposit the money in the child’s name. For a child up to age 15, the money will be deposited in a provident fund in a low-risk plan, with the fund selected by lottery. If the child is 15 or older, the money will be deposited into the same bank as the monthly child allowance is transferred.

Can the savings account be cashed in before age 18?

In principle, no, except for in tragic circumstances in which the child has died or has a life-threatening medical condition (contingent on medical documentation being examined and approved by a doctor from the National Insurance Institute). In such cases, the 500-shekel grant the child was due to receive at age 18 will be paid at the time of the withdrawal, and the NII’s monthly savings deposit will continue until age 18.

How can I know which investment fund will be better managed?

Selecting an investment fund is a complicated matter. Since these funds are not yet in operation, all you can do is look at the overall management of the fund managers managing them and hope that they can manage the child savings fund by the same standards.

It is advisable to look at the returns paid by the provident funds managed by the chosen investment house. With a bank savings plan, management is not an issue. The child receives a fixed return.

What is the difference in the management fees between the various options?

The government bears all the operating costs and management fees, so the question isn’t relevant. After age 21, an across-the-board management fee of 0.23% will be charged on the provident fund tracks.

When can junior cash in?

At what age are you required to redeem the savings?

First, there is no requirement to redeem the savings. The first exit point is when the child turns 18: At that points, parents’ approval is required and capital gains tax has to be paid.

As of age 21, the money can be withdrawn without the parents’ approval. Since it is a provident fund, it may be redeemed at any point beyond the age of 18 with payment of capital gains tax. If the account is kept until retirement, it may be redeemed and will be tax exempt.

All you have to do is submit a form to the provident fund or bank asking to withdraw the money. The form can be found on the websites of the investment houses.

Can you deposit more than 50 shekels monthly?

Yes. A parent who so wishes can increase the government deposit by another 50 shekels, but this 50 shekels will be deducted from the allowance your child gets from the NII. At any point, parents may stop making the added deposit by informing the NII on its website.

Can each parent open a savings fund for a child, or just one parent?

Each child is entitled to one savings fund and no more than that. The parent who receives the child allowance is the one who entitled to make the choices for the child.

What is the actual process and timetable?

A parent who receives a letter must decide where to deposit the money by the end of May 2017. The selection is made online on the NII website or by filling out a designated form that can be downloaded on the NII website and sent by fax or mail.

What if I don’t have internet?

Tzion Mizrahi, director of the children’s division in the NII, says you can call the NII at *2637.

Are the savings tax exempt when they are cashed in?

It depends at which stage the withdrawal is made. With a provident fund, before retirement age, redeemed funds are subject to payment of a (25%) capital gains tax; at retirement, the funds are tax exempt. With a bank savings plan, capital gains tax must also be paid after retirement.

What happens if there is a 2008-type financial crisis at the time the funds are redeemed?

Good question. As a rule, it’s not a good idea to redeem funds during financial crises because you incur any losses in the fund. However, if you have a bank savings plan you won’t be affected in such a case, since this type of account is not exposed to the stock market and guarantees a fixed return.

Is the plan worthwhile if the child is already 16?

This savings can serve as a good basis for long-term savings – and so is relevant at any age.

Will someone who is late in opening the savings fund lose some of the money?

Mizrahi: “No. The deposits up to June 1, 2017 can be received retroactively. After this date, the money will be deposited in the default tracks. For a parent who thinks they want to double the sum, we at the NII are prepared to maintain that sum until the decision is made, but no later than June 1, 2017.”

Where can one track how the savings fund is doing?

For provident funds, the information will appear on the Finance Ministry website and the sites of the investment funds. For bank savings plans, the information will appear with the bank account information. Periodic reports will also be sent by mail.