Why you shouldn’t withdraw severance pay

Since the changes in the pension plan programs was implemented in Jan 2008, much confusion still exists.

In the past when an employee was fired after a minimum tenure of 1 year, they were paid severance pay by the employer.

Some employers had a severance pay fund that they contributed to each month in order to offset sudden large payments to terminated employees. For the employee this really didn’t matter as they still received the money directly from the employer.

Then there were employers who started an account for there employees in a Bituach Menahalim (manager’s insurance) plan with an insurance company. These plans allowed the employee to diversify their monthly contributions (as well as the employer’s contribution) by designating part as a lump sum payout at retirement and part as a pension to be paid monthly at retirement. This was changed making it mandatory to designate one or the other when signing up for the plan.

In 2008 that changed with implementation of the mandatory pension plan, which basically did away with the lump sum payout altogether. The idea was to ensure that all employees had a pension for retirement.

The pension plans all have several components: employee’s contribution (which is deducted from their payslip each month), the employer’s contribution (which is noted on the payslip as well) and severance pay contribution, which is paid by the employer. This is usually 8.33% of the gross base pay.

Before the implementation of the mandatory pension plan law, employees who were terminated from their jobs were only paid severance pay by the employer if the amount in the severance pay portion of the pension plan wasn’t sufficient for the amount owed by law. In cases where it was sufficient, the employer provided the employee with a signed release letter to the pension fund, in efeect releasing the accumulated sums to the employee. Many non-suspecting employees withdrew the severance pay portion, thereby seriously hindering their future pension payments from the fund by reducing the capital substantially and rendering their account non-active.

If someone were leaving employment to go on pension, it might make sense to withdraw the severance pay portion if they needed the money, but for employees who still have many years until they reach retirement age, it is highly inadvisable as it will hinder their monthly pension when the time comes to utilize it.

Now you cannot say that you didn’t know.

Disclaimer notice: This article is intended to be general information only and not to be taken as specific advice. In each case it is highly recommended that you speak with a licensed pension plan advisor/ insurance agent or with the pension fund, specifically, as the profitablity differs in each case.



Moshe Egel-Tal, CSPP
Founder and CEO, Israpay   "making payroll simple"

 Email:  moshe.israpay@gmail.com

Skype: motal7

Snail Mail:  p.o. box 44429 Jerusalem, Israel 91443

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Israpay was founded in 2009 with the goal of helping Anglos better understand Israeli labor laws. Whether you are an employer or an employee it is imperitive that you understand what employee's rights are. If you are an employer this will help you avoid possible lawsuits in the future and/or legal sanctions by the Ministry of Industry, Trade and Employment's Administration of Enforcement and Regulation dept. If you are an employee, it is imperitive that you know what your rights are and how to read your payslip. Israpay has vast experience in setting up and implementing payroll departments and procedures for companies to suit their needs. private consultation is available to both employees and employers.
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