These days the ability to save money efficiently has become imperative for any individual. Our salaries should be kept in lucrative conditions to keep up with rising prices.
Therefore, many options for saving have sprung up in the last few years; two of them are provident investment funds and savings policy. This article will discuss the advantages and disadvantages of both.
Descriptions
Investment provident fund are a type of savings plan which allows the deposit of a certain kind of sum to a special account. This deposited sum is then invested by experts in the field to yield extra money for its depositing owner. Its main goal is to encourage people to save a large enough sum of money for their eventual retirement.
A Savings policy works in a relatively similar fashion to investment provident funds, with slight differences. Their goal is also to allow people to save money using investments. However, they are not geared specifically towards retirement ages. Their plans can also be directed towards short and medium - term savings plans.
Risk
Generally speaking, savings plans are considered a safer method in terms of risk. In addition to the riskier options of putting your funds in the more dangerous stock markets, their plans also include more solid options. These allow for further diversification of one’s owned sum and lesser risk when it comes to investments.
Investment provident funds are more geared towards long terms saving and investments. The more a person needs his investment to be long term, the more profitable it is to put that sum at a greater risk. Therefore, investment provident funds are more inclined to include dangerous options for investment.
Bargaining
In general, savings policies allow one to haggle on the conditions and fees that constitute the chosen savings plan. Savings policies are run by private companies, whereas investments provident funds are usually government run. If a plan’s fees seem too high, one can count on being able to haggle their way to better conditions.
The fact that investment provident funds are government - controlled means that the conditions are stricter, and that there’s little room for maneuvering in that respect.
Fees
One advantage the investment provident funds have over savings plans is their lower fees. Their original goal is dictated by the government, which is to encourage people to save larger sums of money for their retirement. Because of this, they are programmed in advance to charge smaller fees for all the income generated.
Savings plans are run by the different insurance companies in the market. Their goal is to generate income not only for their customers, but also for themselves. Therefore, they can charge larger fees for their work in investments.
Taxation
One disadvantage the savings policy has when is the fact that its taxed quite heavily upon eventual withdrawal. A 25% profits tax is imposed when the sum is withdrawn from the plan, which can be quite discouraging for some people. However, switching investment types during the plan is not taxed, only the eventual withdrawal.
Additionally, if the owner of a savings plan dies, his beneficiaries are required to pay the same tax upon his death.
Investment provident funds do not have any form of taxation on the sums upon withdrawal. Also, if the owner dies, no tax is required to be paid unless the owner was over the age of 75.
Accounting Liquidity
Both plans allow for certain ranges of accounting liquidity (The ability to withdraw desired sums from the plan’s account) during work life. However, they have some distinct differences when it comes to the withdrawal of the sum at retirement.
As mentioned earlier, investment provident funds are designed to allow good yields when saving money for pensions and eventual retirement. This means that the money earned is given as allowances on a monthly basis. This is good for when one wants the sum to be limited monthly for wiser spending at life’s latter, jobless stages.
On the other hand, savings policies are not limited by how frequently a sum is withdrawn, and not limited by how large it is at reception. This is good for when one wants to spend the entire money in a short period of time. For example, this can be used to invest in areas which require large money sums, further increasing income.
Tax incentives
A major advantage belonging to provident investment fund is the tax incentive given at eventual withdrawal. In Israel, when reaching the age of 60, withdrawal from this plan is given a complete tax exemption for the entire sum.
This contrasts with savings plans, which only allow for tax exemptions in less favorable conditions and only for partial exemptions. The Israeli government allows for tax exemptions only for people born before 1.1.1949, and this exemption cannot exceed 16,500 NIS for a couple, or 13,500 for a lone individual.
Age
Both savings plans and investment provident funds are a good opportunity for parents to save money for their kids when they grow up. An investment provident fund can be opened at any age, while a savings plan can be opened by one who has an ID card. (The parents simply open a plan themselves, so age limit is not an issue)
Investment limit
Each plan has its own conditions for monthly deposit.
In general, savings plans usually do not have a certain defined limit for how much money can be deposited into the savings plans. This means that one can more easily increase the plan’s monthly income if large sums are added, making it several time more lucrative than before.
In contrast, investment provident funds in Israel are limited in the monthly deposit value. A sum no larger than 71,000 NIS can be deposited each month to the plan. This limits the opportunities for extra potential income generated by the plan.
In Conclusion
Both plans have their own advantages and disadvantages. One must take into consideration their own financial needs and conditions, and then decide which plan suits them best.
This article was written in cooperation with Adifim