What Is a Pension Fund and How Does It Work?

For most people the pension is the biggest savings they have – and few people check it. Here is the plain-language version: how a fund works, how money gets in, how to choose a track and what to compare between funds.

01What is a pension fund?

A pension fund collects money while you work and pays it back as income after you stop. Contributions come in regularly, usually from both you and your employer; the fund invests them for decades; at retirement the money is paid out, typically as a monthly pension.

Who carries the risk depends on the kind of plan. That is the first thing to know about any pension.

02Defined benefit vs defined contribution

Definitions from the U.S. Department of Labor (opens in a new tab). Israel's new pension funds are of the defined contribution kind.

03How pension funds work in Israel

Israel has both kinds. Budgetary pension is defined benefit: 2% of the determining salary for each year of work, up to 70%, paid from the employer's budget. Since 2003 new employees are no longer insured in it (Kol Zchut (opens in a new tab)). Almost everyone starting work today saves in an accumulating (defined contribution) pension: a new pension fund, managers' insurance or a provident fund for annuity.

Saving is mandatory for employees: under the general extension order the employee contributes 6% of salary and the employer 6.5%, plus 6% for severance (Kol Zchut (opens in a new tab)). A comprehensive new pension fund also includes disability and survivors' insurance, the part people tend to forget it buys.

04How does a pension fund work?

A pension fund is a long-term savings plan meant to ensure a steady monthly income after retirement. It replaces your salary in later life and also provides insurance for disability or death – so your family is protected too.

05How does money enter the fund?

Each month both you and your employer deposit a percentage of your salary into the pension fund – usually around 18.5% in total, including the employer's share and severance (Kol Zchut (opens in a new tab)). The fund manager invests it in different tracks, aiming to grow your savings until retirement.

06What is an investment track?

Pension funds offer several investment tracks – general, stocks, bonds, index and more – each with its own risk and return profile. Some funds also have unique tracks, such as ones that follow religious guidelines. The right track helps you make the most of your savings.

07How do you choose the right track?

The track you choose affects how much you accumulate. As a rule of thumb: the younger you are, the more risk you can afford (for example stocks), and as you get older it makes sense to move gradually to a steadier track to protect what you've built.

1. When young

   A long horizon, more time to recover

   You might consider a track with higher exposure to stocks.

2. Midway

   Balance

   Re-check the fit and the fees, especially after a life change.

3. Near retirement

   Protect what you've built

   People tend to move gradually to a steadier track.

08What if I didn't choose a track?

If you don't choose, you are placed in a default track based on your age. It is usually a balanced track, but not always the best fit for you. Review it every few years and update as needed.

09Can you switch tracks?

Fees from deposits vs. fees from the balance

Want to go through the report line by line? Read how to read a pension statement.

10What should you check when comparing funds?

When comparing pension funds, check three things: management fees, returns over time and the insurance coverage the fund provides. A small fee difference looks negligible in any one year, but over decades of saving it adds up to a significant amount:

Open as a full calculator: Management fee calculator for pension and savings funds

A 15-minute pension check

1. 1

   Grab the latest report

   From the fund's site or app, or from the report that arrives by mail.

2. 2

   Find the fees

   Both from deposits and from the balance – write both down.

3. 3

   Check the track

   Does it fit your age and horizon, and what happens if you never chose.

4. 4

   Check insurance coverage and beneficiaries

   Disability, survivors, and who is listed as beneficiary.

5. 5

   Write down questions for the fund

   Anything unclear is worth asking before you decide anything.

Not sure which funds hold your money? See how to check how much pension you have.

To see what this means for a monthly pension, the pension calculator takes a balance, a monthly deposit, years to retirement, a return and fees, and shows an estimated monthly pension and what fees take from it. It is an illustration based on your assumptions, not a forecast.

11A comprehensive fund and a complementary fund

There are two main types of new pension fund. A comprehensive pension fund includes saving for retirement and also insurance cover for disability and death. A complementary pension fund is meant mainly for deposits above the comprehensive fund's ceiling, and is usually for retirement saving. Not everyone holds both: someone whose deposit exceeds the relevant ceiling sends part of the deposits to a complementary fund. Check the current ceilings and rules on the authority's pages and on Kol Zchut.

12Default funds: what it means for you

Someone who did not choose a pension fund is moved to a fund chosen as the default. Selected pension funds are meant to allow saving at a reasonable cost even for those who did not choose, and they have defined investment tracks. If you started work and did not choose, make sure which fund you are in and on what track, and check whether it suits you. You can move to another fund, under conditions and after checking insurance cover, as explained in How to lower management fees.

13What happens when you retire

At retirement age the balance turns into a monthly pension. The pension is set by the balance and by an annuity factor that reflects life expectancy and terms. Once you receive a pension, fees are charged on the balance only. The savings that remain invested keep affecting the size of the pension, so the investment track and the fees matter in retirement years too. To understand what to expect, check the pension forecast in the Pension Clearing House (opens in a new tab) and compare it with the spending you plan.

• Check the pension forecast in the statement and the clearing house, not only the balance.
• Ask how the pension is calculated, and what the annuity factor is.
• See whether you have beneficiaries and a survivors' pension that suits your family situation.
• Check whether you are still depositing, and if so at what rate.

To understand the statement itself, see How to read a pension statement, and to find every fund see How to check how much pension you have.

14A yearly check of the pension fund

15Common mistakes

• Looking only at the balance and not at the fees.
• Leaving the default track without checking whether it suits you.
• Cancelling insurance cover to save money, without checking what is lost.
• Not updating beneficiaries after a family change.
• Forgetting funds from previous workplaces.

16What to do when you change jobs

1. 1

   Tell the new employer your fund

   Give the new employer the details of the fund you want to continue with, or your choice of a new fund.

2. 2

   Check that deposits arrive

   In the first quarterly statement in the new job, make sure deposits begin.

3. 3

   Keep cover continuous

   Make sure there is no interim period without disability and death cover.

4. 4

   Check the previous fund

   Even if you left the employer, the account stays: check its fees and consider merging.

17What a pension includes beyond the balance

A comprehensive pension fund usually has three parts, and it is worth spotting each one in the statement:

• Old-age pension: the savings meant to become a monthly pension at retirement age.
• Disability pension: cover for someone who lost some or all of their ability to work. The terms and the level of cover are set in the fund's regulations.
• Survivors' pension: cover for a spouse and orphans on death. It depends on the family situation, so keeping beneficiaries up to date matters.

Part of the deposit funds this cover. So it is not always right to give it up to cut costs. Check whether the cover suits your situation and whether it duplicates other insurance you hold, and find the details in the fund's statement and regulations.