Let's play a short word association game….
Close your eyes….
When you hear the word 'deposit', what comes to mind?
Following are some of the answers people gave us: "money on the side; low interest; zero interest; risk - free sleeping cash."
Now… close your eyes again and think of the words 'savings' and 'investment house'. What do you think of this time?
Overall, these are the answers people usually gave us: "shares; too complicated for me; for wealthy people only; more profit but the risk is greater."
One could, in fact, say that these associations represent the views held by many people in Israel; what other explanation could there be for the following figures released by the Bank of Israel a few months ago?
These figures reveal that the proportion of cash and deposits in the public portfolio has reached a ten – year high. Nearly 40% of the public's assets are held in cash.
Altogether, the amount held in deposits is over NIS 430bn.
Now, keeping cash in reserve (in a deposit or even in a checking account) for an unforeseen expense or when finances are stretched is obviously the right thing to do.
But calculate roughly how much of your money is lying in deposits in the bank, and ask yourselves this: has that money been put to work on your behalf at all in recent years?
The answer is quite easy: It hasn't been put to work at all, in other words it hasn't yielded a return for you because since 2008 interest rates in Israel have been very low and in recent years they have been close to zero. And this is set to continue since the Bank of Israel does not intend to raise its official policy rate for another year at least. We are optimistic, however.
Yes, there is.
The name will probably be familiar but presumably you haven't joined one yet: a Savings Provident Fund.
This a relatively new product introduced by the Israeli Ministry of Finance a year ago with precisely this concern in mind - that people in Israel currently do not have a range of schemes to enable them to save for whatever time range they choose.
Most investment houses in Israel now offer accounts in Savings Provident Funds - and so do we here at IBI.
But if those two words 'provident fund' take you back several decades, or make you feel a bit despondent at the thought of the money you have tied up in a pension scheme, get a grip on yourself immediately.
Because a Savings Provident Fund is a different product altogether from the old provident fund.
Before we go on, a few words on something else that is important: cash held in a bank deposit is risk - free.
Money invested in provident fund, on the other hand, does carry a risk, but, and this is important, you choose the level of risk; the choice is wide and there are a number of investment strategies offering differing risk levels, from 10% equities to 100% equities. And, as we all know, the greater the risk, the greater the potential reward.
Savings Provident Funds - Six facts you need to know
You can save as much you want, up to NIS 70,000 a year. In other words, you can either deposit a lump sum of NIS 70,000, or set aside NIS 5,800 a month (but you can also deposit less than that), every year.
This money is not closed. The deposit is liquid and is available for you to withdraw whenever you wish. You decided to save for a few years but something suddenly cropped up and you need the cash? You can withdraw it, with no penalties or questions asked.
Anyone can, and it suits all requirements. Whether you're a grandparent putting some money aside for a grandchild, a father saving for your daughter, or even building a pot of cash for your own use, any account opened in a Savings Provident Fund can accept up to NIS 70,000 a year.
Save for any purpose you choose. Dreaming about taking the whole family on a caravan trip across Europe in a few years' time? Start putting some cash aside for it every month…..Want to create a fund to cover the cost of university education for your children/grandchildren? Whatever your goals are, a Savings Provident Fund can help you save for them.
You can even save towards your retirement. Over the age of 50 and wondering how large your monthly pension payment will be? This is where the plot takes an interesting twist: Once you reach the age of 60, you can draw down your savings in the form of a monthly retirement allowance, tax free. Free of which tax? The 25% capital gains tax, of course. Over time this adds up to a considerable sum that you get to keep rather than see it go into the public purse.
One reader pointed out (thanks for that) that we didn't mention that people saving towards retirement also have to buy longevity insurance cover.
True, and such insurance will of course add something to your costs, but wouldn't it be worth paying the extra charge to keep all the profit your savings account earns rather than letting it go the taxman? Think about it.
So far so good. But there must be a catch somewhere!
Sorry, there isn't a catch. This really is a good product. And we say that not just because we're an investment house that wants your money (well alright, perhaps we do, a little bit), but because the state has singled it out as a good product too. How did it do this? Simple. It capped the annual deposit in a Savings Provident Fund account at NIS 70,000, out of concern that the new product would 'draw in' huge sums of money, significantly weakening other savings products.
This is important, especially given what we said earlier, about deposits lying dormant in bank accounts.
Money saved in Savings Provident Funds is invested in the capital markets, in a similar fashion to pension savings and advanced training funds, so that it generates profit for you over time. You can see details on the performance of our funds here.
OK, we get the message; a Savings Provident Fund is a great product….
We are one of the oldest investment houses in Israel (founded in 1971) and now manage close to NIS 40bn in assets for clients. Thousands of people have already selected us to help them realize their financial goals and put money aside for their children and grandchildren. So think again about the cash you have in deposits or your savings in general and join us.