Recently, relocation has become more common than ever. More and more Israelis are considering severing Israeli tax residency, becoming non-residents, and leaving their Israeli pension behind. A pension is perhaps one of the most important assets you have in Israel, especially when it comes to retirement.
Israeli Pension – How Much Tax Do I Pay on My Pension?
As a general rule, pension income is taxable in Israel under section 2(5) of the Income Tax Ordinance. Under section 4A, the liability also applies to a non-resident, because the liability is determined by the payer’s place of residence – meaning the Israeli pension fund. The tax rate on pensions is your marginal tax rate, similar to the tax rate on all earned income.
That said, there are various exemptions that may apply. These vary depending on the type of pension and additional parameters, as detailed below.
Exemption for a “Recognized” Pension
A “recognized pension” is a pension funded from amounts that were previously taxed, for example through fringe benefit taxation of provident fund contributions in your salary slip. The exemption for this pension is full, under section 9A(b1). Anyone who has reached age 60, or who took early retirement due to a permanent disability of at least 75%, is eligible for this exemption. It is important to note that a pension paid by a veteran pension fund is not considered a “recognized pension”.
Exemption for a “Qualifying” Pension
A “qualifying pension” is any pension other than a survivor’s pension and other than a recognized pension for which a separate exemption was granted. The exemption amount is up to 57% of a monthly ceiling of 9,430, as of 2025. The exemption rate increases gradually and is expected to reach 67% in 2028. Note that only those who have reached the eligibility age are entitled to this exemption. (Eligibility age: retirement age under the Retirement Age Law, or early retirement due to a permanent disability of 75%, or the age at which the taxpayer actually began receiving all or part of the qualifying pension – whichever is later.)
Exemption for a Commuted Pension
Commuting a pension is a one-time withdrawal of part of the pension in exchange for reducing the expected monthly pension. Section 23(a)(1)(a) of the Supervision of Financial Services (Provident Funds) Law determines the pension amount and the number of years that may be commuted, according to minimum ceilings that were set. Such a lump-sum withdrawal is taxed as earned income. However, as long as the amount is included in the overall exempt capital balance for pension purposes, no tax will apply.
The Impact of Withdrawing Severance Pay on the Pension Exemption
In principle, anyone who withdrew a retirement grant that was exempt from tax will not be entitled to the exemption for a qualifying pension, because “there is no double benefit”. However, section 9A(g)(2) provides an option to apply the integrated formula, and in this way apply the exemption after a reduction of 135% of the retirement grants received during 32 years of salaried employment prior to the eligibility age. In other words, every tax-exempt retirement grant you withdraw reduces the exemption at a ratio of 1.35:1. Each exempt shekel used today reduces the future exemption on the pension by 1.35 shekels. If you commuted part of the pension as a lump sum that was exempt from tax, that withdrawal will also reduce the exemption on the pension.
Rights Fixation (Kibbu’a Zekhuyot) – What Is It and What Is the Benefit?
When you begin receiving a pension, you can submit a request for rights fixation (kibbu’a zekhuyot). As the name suggests, this offers a significant advantage not only in the present. It allows you to benefit from the increased exemption rate as well as the increased exemption ceiling. When you choose to fix your rights, you may choose which right you would like to fix: increasing the exempt capital, increasing the exempt portion of the monthly pension, or a proportional increase of the exemption according to the ratio determined in the year of retirement for both rights together. In addition to all the exemption options mentioned above, there is also the possibility of spreading the commuted pension under section 8(c) of the Ordinance, in accordance with the rules that were set. Income Tax Circular 02/2022 provides that disability (loss of work capacity) pension can also be spread. In Ploni v. the Tel Aviv (Gush Dan) Assessing Officer (Tax Appeal 59612-02-15), the court recognized the possibility of spreading over 20 prior tax years.
Early Withdrawal of Pension Funds
If you have been considering an early withdrawal from your pension, you should know the following: the tax on an improper withdrawal before a qualifying date is 35% (a fixed tax rate under Israeli law), with no possibility of applying any exemptions. As non-residents, your effective tax will be higher, since you will not be entitled to tax credit points, except for half a tax credit point granted to a woman. If you were advised to withdraw as part of cutting ties with Israel in a tax residency severance process, you should be aware that this is usually an expensive step from a tax perspective and also harms your rights. It is therefore recommended to avoid it without prior, tailored tax planning.
Tax Residency as a Parameter for Determining Tax Liability in Israel
The question of Israeli tax residency is critical, including when it comes to taxing your pension. Yes, even if you relocated at age 25, the impact is significant. Put simply: an Israeli resident is taxable in Israel on all worldwide income, while a non-resident is taxable in Israel only on income sourced in Israel.
As noted above, a pension paid by a payer that is an Israeli resident is taxable in Israel. As non-residents, you will be taxed in Israel without taking into account any tax credit points (except for half a tax credit point granted to a woman). In addition, your new country of residence may tax the pension in addition to withholding tax in Israel. This situation exposes your pension to double taxation. The conclusion is that before taking any action relating to your pension fund, it is advisable to consult a professional.
See here an expanded discussion of tax aspects for an Israeli resident.
Tax Treaties as the Decisive Factor in the Israeli Taxation Question
Most tax treaties for the prevention of double taxation that were built on the OECD model provide that a private pension will be taxed only in the country of residence. A government pension will usually be taxed in the source country – the country paying the pension. That said, there are a few treaties that do not follow this model. An example is the Israel-Denmark tax treaty. The treaty provides an exception for pension benefits connected to contributions that received tax relief. In such a case, the taxing right is not exclusive to the country of residence. Instead, both countries may tax the pension.
We emphasize that even where an exemption applies under Israeli law, full tax liability may still arise in the new country of residence.
Summary
Scenario | Is there exposure to tax in Israel? | Is there a risk of double taxation? | What is required in practice? |
A non-resident receiving a private pension where there is a tax treaty | Yes – under domestic law. The treaty may eliminate liability. | Yes, if the treaty is not applied in practice. | Submitting a request to reduce withholding tax for a non-resident + providing proof of foreign residency. |
A non-resident receiving a pension where there is no tax treaty | Yes | Yes, with no built-in credit mechanism. | Retirement planning; review of exemptions and spreading. |
Early withdrawal before retirement age | Yes – 35% fixed tax with no application of exemptions. | Yes, very high. | The step is usually expensive and cannot be reduced. |
Partial commutation of a pension | Yes | Yes | Early tax planning; review of exemptions and the future impact on the monthly pension. |
Smart Tax and Benefits Planning – How Do You Time It Correctly?
When you are considering a move to another country, it is important to consult a tax expert who sees the full picture. An advisor who looks only at the parameters relating to local taxation may give a recommendation that, over the long term, will harm you more than it will help. Strategic decisions are made once, and they are not always easy to fix later on.
Nimrod Yaron & Co. specializes in comprehensive advice, professional guidance, and support in tax residency severance, including reviewing long-term tax aspects.
Contact us and we will be happy to assist you with everything related to your relocation process.
FAQ
Is there a need for planning when there is a tax treaty?
Yes. A tax treaty can help reduce double taxation in certain cases, but it does not prevent it entirely. In any case, there are many aspects that must be considered in relocation, regardless of tax treaties.
What is the meaning of an early pension withdrawal during a relocation process?
Beyond the high tax outcome, the implications are broad and may include significant harm to your various pension rights.
Are the exemptions under section 9A also relevant for non-residents?
Yes. Section 9A grants exemptions to individuals and is not limited to Israeli residents. Therefore, as non-residents you may be entitled to the various exemptions as detailed above.
