Quick Answer: Every employee working in Israel — Israeli or foreign — must be enrolled in a comprehensive pension fund (*bituach menahalim*) from their first month of employment. In addition, most employees benefit from a *keren hishtalmut* (training fund), which is Israel's most tax-advantaged savings vehicle. When a foreign worker leaves Israel, they are entitled to withdraw their accumulated savings, though the tax treatment differs depending on the type of account and their home country's tax rules.

If you work in Israel as a foreign national, expat, or new immigrant, you will encounter a pension and savings system that operates very differently from most Western countries. The mandatory contributions begin immediately, the tax benefits are significant but conditional, and the rules for what happens to your money when you leave can be confusing — especially for US citizens who face a second layer of reporting obligations back home.

This guide explains how the Israeli pension system works, what each account type does, the tax advantages available in Israel, and what you can actually do with your accumulated savings if and when you stop working in Israel. It focuses specifically on the perspective of a foreign national — the questions and considerations that are obvious to an Israeli but rarely explained clearly to someone arriving from abroad.

1. Israel's Three-Layer Pension System

The Israeli pension system is structured in three distinct layers, each serving a different function:

  • Mandatory pension (*bituach menahalim*): Comprehensive retirement insurance that every employer must provide for every employee. It covers retirement income, disability income replacement, and survivors' benefits. Contributions are mandatory from the first month of employment.
  • Keren hishtalmut : A tax-advantaged savings fund originally designed for professional development (the name means "training fund"). Today it functions as Israel's most powerful tax-sheltered savings vehicle. Employer contributions are mandatory in many sectors; in others it is offered voluntarily as a benefit.
  • Kupat gemel : A general-purpose provident fund used for long-term savings and supplementary retirement saving. Contributions are voluntary and carry conditional tax benefits.

These three layers operate alongside — not instead of — the National Insurance Institute (*Bituach Leumi*) contributions, which fund state disability benefits, maternity pay, and other social insurance. For a full explanation of Bituach Leumi, see our separate guide on National Insurance for foreigners. The focus of this article is the private pension and savings funds, which are where the significant sums accumulate.

Foreign workers are entitled to participate in all three layers on exactly the same basis as Israeli citizens. There is no nationality distinction in the pension laws, and an employer who fails to enrol a foreign employee in the mandatory pension is in breach of Israeli labor law and exposed to regulatory penalties.

2. Mandatory Pension (*Bituach Menahalim*): Rates and Legal Framework

The mandatory pension was extended to virtually all workers by the Expansion Order for Pension Insurance (*Tzav Harchavat Hapin Hamenahel*), which has been updated several times, most significantly in 2008 and in subsequent amendments. The key points for foreign workers:

When does it start? The employer must enrol every employee in a pension fund no later than six months after their employment begins, but the contributions must be backdated to the first month of employment. In practice, the employer typically selects a fund and enrols the employee from month one. If an employee already has an existing pension policy from a previous Israeli employer, enrolment can be immediate.

Contribution rates: The mandatory minimum contribution rates (as a percentage of the employee's salary, up to a defined ceiling) are approximately:

  • Employer contribution: approximately 6.5% (pension) plus 1.5% (disability insurance) = approximately 8% total
  • Employee contribution: approximately 6%
  • Combined: approximately 14% of salary going into the pension fund each month

These are statutory minimums. Many employment contracts — particularly in the tech sector and for senior employees — exceed these floors. Always verify the exact rates in your employment contract or consult a payroll advisor, as the precise figures are adjusted periodically.

What does the pension fund cover? A standard *bituach menahalim* policy covers three events:

  • Retirement: Monthly income from the fund starting at retirement age (currently 67 for men, 65 for women, with planned increases)
  • Disability (*nechut*): Monthly income replacement if you become unable to work due to illness or injury, typically 75% of salary for qualifying disabilities
  • Survivors (*shnuyim*): A monthly pension paid to a spouse and minor children if the insured employee dies

Which fund? There are dozens of licensed pension funds (*kranot pensia*) in Israel, managed by insurance companies and investment houses. The employer typically selects the fund, but the employee can request a transfer to a fund of their choice. The Israeli Capital Markets, Insurance and Savings Authority (*Rashut Shuk Hahaon*) regulates all pension funds and publishes comparative performance data.

3. Keren Hishtalmut: Israel's Most Tax-Advantaged Savings Fund

The *keren hishtalmut* (training fund) is widely regarded as the best savings vehicle available in Israel — and for good reason. Within defined limits, contributions grow completely tax-free, and withdrawals after the required holding period are tax-free in Israel as well. No other Israeli investment account offers this combination.

Who contributes and how much?

  • Employer contribution: 7.5% of the employee's salary (up to a statutory ceiling)
  • Employee contribution: 2.5% of the employee's salary (up to the same ceiling)
  • Total: 10% of salary contributed each month, split 75%/25% between employer and employee

For employees earning above the tax-exempt ceiling (which is updated annually — verify the current figure with your employer or a tax advisor), contributions on the excess are still allowed but lose their tax-exempt status in Israel.

Is it mandatory? A *keren hishtalmut* is mandatory for employees covered by certain collective labor agreements, including academia, civil service, and many private-sector technology companies. For other employees it is offered voluntarily as part of a compensation package. If your offer letter includes a keren hishtalmut as part of your benefits, examine the contribution rates — it is one of the most valuable components of Israeli compensation.

The six-year lock-up: Funds in a keren hishtalmut are locked for six years from the date of the first contribution. After six years, the entire accumulated balance — principal and returns — can be withdrawn completely free of Israeli tax. Before six years, early withdrawals are permitted only for specific purposes (professional training or education), and the withdrawn amount is subject to capital gains tax (*mas revachei hon*).

Investment inside the fund: Your keren hishtalmut contributions are invested in one of several tracks you select: a default balanced track, a higher-equity track, a bond-heavy conservative track, or increasingly, passive index-linked options. The fund grows in a tax-sheltered environment — no capital gains tax on gains within the fund, regardless of how long it takes to reach the six-year threshold.

Self-employed individuals: Freelancers and self-employed persons can open a keren hishtalmut independently. They can contribute up to approximately 4.5% of their income (up to a defined ceiling) and deduct a portion of that contribution from their taxable income. The tax benefit is less generous than for employees but still significant.

4. Kupat Gemel: Long-Term Savings and Supplementary Pension

A *kupat gemel* (provident fund) is a general-purpose, long-term savings account. Contributions are voluntary, and there are no employer-matching requirements (though employers sometimes contribute as an additional benefit). Key characteristics:

  • Flexibility: You can contribute any amount at any time. There is no fixed monthly obligation as with a keren hishtalmut.
  • Long-term lock-up: Until retirement age, withdrawals are restricted. Early withdrawal triggers capital gains tax on accumulated growth.
  • At retirement: Balances can be converted into a monthly annuity, which is taxed as income, or withdrawn as a lump sum under certain conditions. The tax treatment depends on when contributions were made and for how long the fund was held.
  • Investment tracks: Like a keren hishtalmut, a kupat gemel lets you choose your investment track from conservative (mostly bonds) to aggressive (mostly equities).

For most foreign workers in Israel for a defined period, the kupat gemel is less relevant than the keren hishtalmut — it is primarily a retirement vehicle, and foreign workers typically want access to their savings when they leave, not decades later. However, it may be worth maintaining a kupat gemel if you anticipate retiring in Israel or if your employment contract includes employer contributions to one.

5. Tax Benefits in Israel

Israeli tax law provides generous sheltering for pension and savings contributions, which is part of why the system is popular even among workers who do not intend to stay in Israel long-term.

Mandatory pension contributions: The employee's contributions to a *bituach menahalim* are deductible from taxable income up to defined ceilings. The employer's contributions on your behalf are not counted as taxable income to you in the year they are made — they accumulate tax-deferred until you draw a pension or withdraw the funds.

Keren hishtalmut: This is the crown jewel. The employer's contributions (up to the salary ceiling for tax-exempt treatment) are not counted as taxable income to the employee in the year of contribution. The fund grows inside a tax-free wrapper. Withdrawals after six years are completely free of Israeli tax. This means that for an employee receiving a salary partly "converted" into keren hishtalmut contributions, the effective take-home value is significantly higher than raw salary figures suggest.

Kupat gemel: Contributions to a kupat gemel (above the amounts already going to the mandatory pension and keren hishtalmut) can give rise to an additional tax credit on amounts contributed. The credit rate and ceiling are adjusted annually — confirm the current figures with a tax advisor.

Important limit: The combined tax-exempt ceiling for employer keren hishtalmut contributions is set against a maximum monthly salary. Contributions on salary above this ceiling are taxable as income to the employee in Israel. This matters for high earners in the tech sector where total compensation is substantial.

6. When You Leave Israel: Withdrawal Rules and Tax Consequences

For many foreign workers, the most pressing question is: what happens to my accumulated pension and savings funds when I leave Israel? The answer depends on which fund and how long you contributed.

Mandatory pension (*bituach menahalim*): You cannot simply withdraw the entire accumulated balance when you leave Israel if you are leaving before retirement age. The pension is designed as a retirement vehicle, and early withdrawal is not a standard right. However:

  • The disability and survivors' insurance component of the policy terminates when employment ends
  • The accumulated retirement savings remain in the fund, growing with investment returns, until you reach retirement age — at which point you can collect a monthly pension even if you live abroad
  • Some pension policies allow a partial "redemption" (*pkiat zchuyot*) of the savings component — but this triggers income tax and penalty-equivalent levies on the withdrawn amount. This is rarely advantageous
  • If you are moving to a country that has a totalization agreement with Israel (covering pension rights), this may affect how your Israeli pension years count toward benefits in your home country

Keren hishtalmut: If you have completed the six-year holding period, you can withdraw the full balance — principal and gains — completely free of Israeli tax. This applies even if you are leaving Israel. A worker who contributed for six or more years and departs can withdraw their keren hishtalmut tax-free in Israel before or after leaving. If you leave before six years, early withdrawal triggers Israeli capital gains tax on the earnings portion (not the principal).

Kupat gemel: Early withdrawal before retirement age triggers taxes. If you have reached Israeli retirement age (67/65), you can receive the balance as a lump sum or annuity subject to applicable Israeli income tax rules. For most foreign workers leaving before retirement age, the kupat gemel balance will sit dormant until retirement age or until a transfer arrangement is made.

Practical steps before leaving:

  • Request statements from all pension and savings funds to understand your current balances
  • Ask your employer's HR department for the fund manager's contact details — you will need to manage the funds directly once employment ends
  • If your keren hishtalmut is past the six-year mark, consider whether to withdraw before leaving or let it continue growing tax-free
  • Engage an Israeli tax attorney or CPA before your departure date to model the tax consequences of withdrawal versus leaving funds in Israel

A Swedish software engineer who worked in Tel Aviv for seven years accumulated NIS 138,000 in a keren hishtalmut by the time he relocated back to Stockholm. Because he had completed the six-year qualifying period, he withdrew the full balance — including NIS 31,000 in investment earnings — completely free of Israeli income tax, by submitting a withdrawal form directly to the fund manager and providing his Swedish IBAN for the transfer. His Israeli employer's HR department confirmed the six-year calculation using his original employment contract date. In Sweden, his tax adviser confirmed that the withdrawal was treated as a taxable lump sum under Swedish law and included in his Swedish annual return — illustrating that the Israeli tax exemption on exit does not shield the funds from home-country taxation. The lesson: model the home-country tax impact before withdrawing, as the "tax-free" Israeli treatment may simply defer, not eliminate, the tax burden.

7. US and International Tax Treatment of Israeli Pension Funds

For US citizens and green card holders working in Israel, the Israeli pension system creates a separate layer of complexity: the IRS treats Israeli savings funds differently from how Israel treats them, and non-compliance carries significant penalties.

Keren hishtalmut and the IRS: The IRS does not recognize the keren hishtalmut as a tax-exempt pension plan. From a US tax perspective, employer contributions to a keren hishtalmut may be treated as taxable compensation in the year contributed — even though Israel does not tax them. This means US citizens may owe US tax on employer keren hishtalmut contributions in real time, while the Israeli tax exemption does not benefit them until withdrawal.

Reporting obligations: US citizens in Israel with pension and savings fund accounts must consider multiple reporting requirements:

  • FBAR (FinCEN 114): Israeli pension funds, keren hishtalmut accounts, and kupot gemel with an aggregate value exceeding $10,000 at any point in the year must be reported on the FBAR
  • Form 8938 (FATCA): Depending on your filing status and total foreign financial asset value, these accounts may also require reporting on Form 8938
  • Form 3520: Some US tax practitioners take the position that a keren hishtalmut must be reported as a foreign trust on Form 3520. The penalties for failure to file Form 3520 when required are severe — 35% of the fund's annual contribution or $10,000, whichever is higher. This is an area of active dispute among US-Israel tax professionals; consult a specialist before assuming your keren hishtalmut does not require Form 3520 filing

The US-Israel tax treaty: The US-Israel income tax treaty (signed in 1975) does not include a modern pension article equivalent to those in newer treaties, which means Israeli pensions receive limited treaty protection in the US context. This is one of the reasons US citizens in Israel working with both countries' tax systems are advised to engage a dual-qualified advisor familiar with both regimes.

For other nationalities: Citizens of EU member states, UK nationals, and others should consult their home country's tax authority guidance on foreign pension funds. Many countries treat Israeli pension accumulations as taxable investment accounts rather than pension plans for local tax purposes, particularly the keren hishtalmut, which has no close equivalent in most European retirement systems.

The intersection of Israeli pension law and foreign tax obligations is one of the most complex areas of Israeli tax law for expatriates. Our guides on FATCA and FBAR reporting for Americans in Israel and Israel's double taxation treaties cover these issues in more depth.

In Practice: For US citizens working in Israel, employer contributions to a keren hishtalmut may constitute taxable US income in the year the contribution is made — even though Israel treats them as completely tax-exempt. US citizens who discover this retroactively may face back-taxes plus penalties across multiple years of employment. Consult a dual-qualified US-Israel tax advisor at the start of employment, not when you are leaving Israel with accumulated funds.
In Practice: Israeli pension fund accounts (including bituach menahalim and keren hishtalmut) with an aggregate value exceeding $10,000 at any point during the year must be reported on the FBAR (FinCEN 114). Some US tax professionals also take the position that a keren hishtalmut requires Form 3520 filing as a foreign trust — a position that is actively contested, but carries penalties of 35% of the annual contribution or $10,000 (whichever is higher) if the IRS disagrees with your chosen approach. Document the professional advice you receive.