Settling tax aspects when transferring pension funds to an ex-spouse

The law sets out two different types of retirement savings, each with its own rules, as detailed below:

• Pension savings through accumulation of rights
• Accumulation of rights under the budgetary pension, savings in an old pension fund and in old insurance policies.
• Pension savings through accumulation of sums
  • Saving in a provident fund for an annuity.
  • Provident fund for benefits.
  • Private provident fund for severance pays and investment provident fund.
  • Fund which is not an old pension fund, an old insurance policy, Central pension fund for annuities, central pension fund for contributions to a budgetary pension.

Spouses who have separated and the judgment stipulates that the former spouse is entitled to a share of the former spouse's pension savings, in accordance with the law for Division of Pension Savings Between Separated Spouses 2014.

• Funds that have been transferred to a new account in a provident fund for annuity on the name of the ex-spouse of a member in the provident fund pursuant to article 6(a) or article 6(e)(1)(a) of the law for Division of Pension Savings Between Separated Spouses, will be considered as an income received by the transferring spouse.
• Article 124c of the ordinance provides that the tax rate on such income will be the tax rate determined in the third tax bracket of article 121 of the ordinance (from tax year 2024, the rate is 20%). The tax will be deducted equally from both spouses.
• However, article 9(17a), of the Income Tax Ordinance provides that, if certain conditions are met, a tax exemption (subject to a ceiling) will apply to the spouse's pension savings funds transferred to a new account in the former spouse's name. 

Transfer of funds to the ex-spouse

• Because of the tax exemption detailed above, and with the aim of shortening the process of obtaining it, the tax authorities have ordered that the provident fund would transfer the saving funds to the ex-spouse without withholding tax at the source, and without the need of the tax assessor's approval.
• To this end, the following two conditions must be met:
  • The spouse transferring the savings funds will submit to the pension fund a “report of the amount accumulated for the distribution of pension savings between separated spouses” from a central pension clearing system (“balance for distribution - pension clearing system”). They can generate the balance report for distribution autonomously on the website of a central pension clearing system.
  • The amount of savings in the “Balance for distribution Report - Pension Clearing system” does not exceed the amount of the “ceiling”, as defined in Article 9(17a)(d) of the Ordinance: as from 2024, a total of 1,697,400 NIS.

• If the pension fund does not submit a “balance for distribution report - pension clearing system”, or if the amount of savings in the report exceeds the maximum amount, an application for a tax exemption or tax deduction must be submitted to the tax assessor.
• The application must be submitted to the tax assessor's office where the file of the transferring spouse is being handled, or to the tax assessor's office that belongs to his or her area of residence, if he or she does not have a file.
• The following documents must be attached:
  1. The verdict or decree.
  2. Balance for distribution report - pension clearing system
  3. If an actuary is appointed, his/her report must be attached.
  4. Approval of each pension fund, including:
     • The balance as of the date close to the date of application.
     • The total sums transferred to the provident fund in the former spouse's name, in accordance with the provisions of article 6 of the law, while splitting between the components of the account and the exempt payments, as defined in article 9a of the ordinance, and non-exempt payments.
  5. If the amount of savings in the balance for distribution report - pension clearing system, exceeds the ceiling set in Article 9(17a) of the Ordinance, the application must be submitted using form 159b and the following documents must be attached:
     • Approval of a central pension clearing system that includes all savings products - pension clearing report.
     • Approval as detailed in section 4, as of the time of separation.

If no balance for distribution report - pension clearing system, is presented to the provident fund, or if the provident fund does not receive instructions from the tax assessor regarding tax exemption or tax deduction, tax will be withheld at the rate determined in article 124c of the ordinance (as from 2024 - 20%) in equal shares from both spouses at the time of the transfer of funds.