In the last decade, people saw no point in depositing money for savings – ‘after all, you get ridiculous amounts in bank deposits anyway’ people said to themselves, and rightly so. The interest rates were zero. So now the interest rates are rising and the banks realize that they must start giving more attractive interest rates to customers (here is the summary of the interest rates you can get now). But next to savings in the bank there are other savings devices that are worth getting to know. These are channels that also allow exposure to the capital market, where when you save for the long term – the returns are the highest, because the person also takes the greatest risk of losing the money.
The savings policies try to allow people the accessibility to invest in the capital market, but without the need to choose specific stocks or specific mutual funds. This is a medium-term savings device, the flexibility of which allows even those who have no investment experience in the capital market to invest money – and apparently also to make a profit in the medium-long term.
What is a savings policy?
Unlike the old savings plans that the banks marketed, you can open a savings policy with one of the insurance companies, or the various investment houses. It is important to emphasize – there is no insurance component in savings policies. This is a savings device only, where the money saved can be used by the savers at any time, for any purpose. The money in the savings policy is not closed or ‘locked’ for a certain period, and is available for withdrawal whenever you need the money, both as a lump sum and in the form of monthly payments, similar to a pension.
The client is the one who chooses the investment path, and also adjusts the appropriate risk level for himself. The investment managers of the policy manage the funds for him, with the aim of accumulating returns according to the investment channel that the client has chosen. The commissions can reach 2%, but it is usually possible to obtain management fees of about 0.9% (expansion on the average management fees in the various companies – in the table at the end of the article) due to the competition in the field. And of course – the higher the savings, the more the management fees can be reduced.
What are the advantages and disadvantages of a savings policy?
The savings policy has advantages and disadvantages. We will present them in the following lines.
The advantages of the savings policy:
Free withdrawal: Unlike pension funds, training funds or the old savings plans in banks, the withdrawal of the funds in the savings policies is free. There are no exit points, no fines and no limit on withdrawal amounts.
Withdrawal of a fixed monthly amount: It is possible to set a fixed monthly withdrawal amount, which can help savers benefit from the savings over the years. There are different rules on how not to ‘eat the savings’, where the rule of thumb is that if you withdraw 3-4% per year, the portfolio will probably survive for years (if you reduce the withdrawals in bad years of the capital market, the portfolio will of course be able to improve better in the following years and increase the survival of the bag)
Flexible deposit amounts: There is no limit on deposit amounts (unlike an investment provident fund, where you cannot deposit more than NIS 71,000 per ID per year), there is no need to commit in advance on deposit amounts and there is no ‘too big’ or ‘too small’ amount to deposit. You can deposit varying amounts of money, at varying times. However, sometimes the companies ask for a minimum amount to open a policy (for example, NIS 50,000 or more. In this case, you can invest through an investment provident fund – which yielded a 50% return in five years – here is the summary of the returns).
Investment Management: The amounts that the saver invests in the savings policy are an investment for all intents and purposes. The company in which the saver chose to deposit his money will manage the investment for him according to his determination, which also includes the level of risk he chose.
Diversification and dispersion: The insurance company where the money is deposited will diversify the investments, that is, it will invest in different channels, in different shares, in different sectors, in bonds and in alternative assets (for example, infrastructure, sheltered housing, etc.) in order to reduce the volatility of the portfolio. The number one enemy of the investor is the fear of falls. People sell in dips and that’s how losses are fixed. Through the moderation of volatility the returns may not be dreamy but on the other hand the portfolio does not crash together with the capital market (which tends to fall by 10-20% every two years, and by 50% every 10 years).
Transition between tracks: You can easily switch from one investment route to another, without penalties and without delays. There are also companies such as Khashara through which it is possible to spread the money in several different investment houses, and in this way if the saver wants to switch between managers, he can without incurring a ‘tax event’ (more on the subject below).
Management Fee: In the savings policies, the managing body cannot unilaterally change the management fees. However, negotiations can be conducted at any time, with the aim of reducing them. With the exception of the management fee, there are no other expenses for managing the savings. Management fees can be very high, but on average they are around 0.9%.
Option to get a loan against the funds saved in the policy: Leveraging too much is not a wise financial decision, but sometimes some leverage is reasonable. In the savings policies, you can get a loan against the funds in the policy. In any case, before taking such a step, it is important to carefully check whether it is worthwhile.
But in front of the advantages, there are also some disadvantages in the savings policy
The absence of tax benefits: If the policy savers are pensioners, they are exempt from capital gains tax up to the ceiling set by law. But any saver who is not a pensioner is not entitled to tax benefits when withdrawing funds from the policy. Contrary to this, and those who are interested in this, can save in provident funds for investment, where you can get a tax benefit, if you withdraw the money in the form of an annuity after the age of 60 (but there is an annual deposit limit for each ID card of NIS 71 thousand).
Monthly updates only: The information in the savings policy is updated once a month. That is, if during a certain month the capital market falls – the information will arrive significantly late to the data that can be seen in the policy. If you’re saving for the long term, it doesn’t really matter, but those who still want to see the changes online won’t be able to. If, for example, the saver wishes to change the ratio between bonds and shares, in order to protect the accumulated profits, he will not be able to do so.
It is not possible to transfer the policy to another company without paying tax: The transfer of money from one company to another constitutes a tax event, because it involves withdrawing funds and transferring them in their entirety to another place. In such a case, a saver who has already profited from his investment in the policy and who is not a pensioner, will pay a capital gains tax of 25% on the profits he has accumulated. This is definitely a significant disadvantage of the policy, although as mentioned above – there is a way around this, not with the aim of avoiding paying tax, but to postpone the tax event until the time when the saver wants to exercise the portfolio.
Tax in case of death: If the saver in the savings policy has passed away, his beneficiaries will have to pay full capital gains tax. This is one of the notable disadvantages of a savings policy compared to provident funds, where the beneficiaries do not pay capital gains tax if the policy owner dies before the age of 75.
Who can and who should save through a savings policy
So it’s true, the savings policies have advantages compared to investment provident funds, and also disadvantages. In the end, these are two similar products, with a tax priority for the investment provident funds (but on the other hand with a limit on deposits in the investment provident funds). A savings policy allows you to transfer the funds from the bank account to a savings account, thus avoiding the temptation to ‘spend’ the money left in the balance. This is an investment device for people who want to save but don’t want to ‘wrack their heads’ over which stock to buy
How to choose a savings policy?
The choice of the savings policy should take into account the investment amount, the returns of the selected policy manager in relation to others. However, it is important to make a proper comparison. If you have chosen a certain route, compare this route also in relation to the other funds you choose. In addition, it is important to examine the returns of the policy over the years, and not just in relation to the last year, because the data can be misleading. And of course – make sure you get the lowest management fees possible. In the end: high management fees bite into your savings and this is a net loss (and net profit of the management company).
Management Fee: It was already mentioned above the fact that the management fees in the savings policies can reach up to 2%. However, in practice the management fees range from 0.8-1.1% in the general and equity tracks. This is certainly subject to negotiation, and the lower the management fee, the more affordable the policy. The world’s largest money managers repeatedly say that you cannot in any way influence the returns or know which investment manager will generate a better return over time, but they also say that you can definitely influence the management fees – make sure they are as low as possible.
balance of assets: You should check the balance of the assets, because the larger it is, the more stable the policy is, apparently.
Comparing routes and performance in savings policies
It’s true, the markets are in decline this year, and that doesn’t stop the savings policies either. But look at the medium ranges and you will see that in the end the returns are positive:
Here are the returns in the general route in savings policies:
And here are the returns in the shares route in the savings policies:
We will not list all the routes. They can be found at the various management companies. The main routes are a general route, which combines a significant component of bonds in order to reduce the risk when the stock market chooses to crash, and at the same time also a large component of stocks (about 40-50%). Another important route is the equity route – where the risk is greater but the chance is correspondingly greater. The general route yielded a 30% return over a five-year period, the equity route yielded a 50% return.
Other tracks are more solid tracks such as tracks biased to bonds (80% bonds and 20% stocks for example or tracks that invest only in bonds and not in stocks at all). In times of declines in the stock market the ‘solid’ tracks tend to fall more, but Of course – when the markets soar, the equity routes cost much less than the stock-biased routes. The route that invests only in bonds yielded an 11% return in 5 years, a route of up to 10% in stocks yielded 12% and the route of up to 15% in stocks yielded 19% on average . A route of up to 25% shares yielded a 20% return.
There are also the very defensive routes – those that are mainly a substitute for cash and in which you don’t expect to get a high return. These are short-term shekel routes in 5 years, they yielded zero returns.
It is important to know – no one knows what a day will bring. You can only look at the past and assume that routes that yielded good returns in the past will – in the long run – yield better returns in the future as well. However, history shows that over the years, the savings policies do yield handsome profits to their holders. And maybe it’s also worth saying: even when you hold cash it’s not really a risk-free asset – inflation erodes the value of money, so there are those who will say that this is a certain risk of losing some of the money.