Retirement Choices: Annuity vs. Annona — Which is Right for Your Future?
Transitioning to retirement requires a shift from an accumulation paradigm to a withdrawal one. There are two primary mechanisms: the lifetime pension annuity and the 'annona' (regular withdrawal). Experts explain the differences in taxation, flexibility, and risk, helping retirees balance guaranteed income with control over their capital.
The transition from working years to retirement years requires us to make one of the most complex mental shifts in our economic life: moving from a paradigm of accumulation to a paradigm of withdrawal. For decades, we have been accustomed to depositing, saving, and accumulating assets.
In one day, the role of our portfolio flips from saving to the source of income that will fund our lifestyle. When examining how to turn accumulated capital into a regular monthly flow, there are two basic concepts that every retiree must know: the first and more familiar is the "pension" (annuity); the second, slightly less familiar but of crucial importance, is the "annona" (regular withdrawal).
This week in the "Calculating Retirement" section, we will organize these two mechanisms, examine the differences between them in terms of taxation, flexibility, and full security for life, and understand when each of them comes into play.
As always, the things said and the examples brought in this section are only rules of thumb. They do not take into account the personal data, tax brackets, family needs, or the unique risk profile of each individual, and are not a substitute for professional advice.
What is a pension annuity, and in which products does it exist?
An annuity is received solely from pension instruments — a pension fund and executive insurance. Other savings, such as an investment provident fund (Kupat Gemel Le-Hashkaa) or funds managed according to Amendment 190, are transferred on the day of retirement to one of these instruments so that they can be translated into a monthly annuity.
Once the savings become an annuity, a dramatic change occurs: the accumulated amount no longer belongs to us in the classic sense of ownership, and the ability to make changes or withdraw the money as a one-time capital sum becomes limited to non-existent.
This is usually an irreversible decision. All rights, including conditions in the event of death or transfer to heirs, are derived solely from the retirement track chosen with the management company. On the other hand, this is the deal: the annuity is paid to us for all our days, regardless of how much money we actually saved or until what age we live. That is, certainty at the expense of flexibility.
And what is an annona?
An annona, by contrast, is a mechanism for withdrawing a regular flow from existing liquid savings — such as a savings policy, investment portfolio, training fund (Keren Hishtalmut), bank deposit, and more. In this case, the portfolio continues to manage the money and accumulate returns according to the chosen track and risk level, but a "small hole" is defined at the bottom, through which a regular monthly flow drips to us. Unlike a pension fund, in an annona, control remains entirely with you: you can change the amount of the monthly payment at any time, withdraw a large one-time sum for any need, and if you pass away — the entire remaining balance passes in full to the heirs.
However, this is exactly where the main disadvantage lies: the money that exists is only what has been accumulated in the fund. If it runs out, the flow stops.
What are the tax differences between the two?
Roi Klein, Director of Finance at Menora Mivtachim, explains that "taxation differs according to the source of the money: a pension annuity is usually considered income subject to income tax, but at retirement age, it is possible to receive an exemption on part of the annuity through a 'rights fixation' (Kibua Zchuyot) procedure." In short, rights fixation is a basket of exemptions that the state grants to retirees, totaling up to one million shekels at most, depending on the saver's choice.
"Also, withdrawing from a liquid training fund may be tax-exempt, subject to meeting conditions and ceilings," adds Klein. "Capital withdrawal from an investment provident fund is subject to tax on profits, while receiving the money as an annuity after age 60 can be exempt from capital gains tax."
Is it even possible to choose between the two, and how do you know what is better?
In some cases, the answer is yes. It is possible to transfer savings from liquid assets to pension products to create an annuity, and in some cases, vice versa. "In most cases, it is correct to view an annona as a supplement to an annuity and not a full substitute for it. The annuity can be used to cover fixed and essential expenses: housing, food, health, and bills, while the annona can fund variable expenses, entertainment, travel, or assistance to family members," says Klein.
Asi Kriti, CEO of "Kriti Financial Life Coaching," adds that the question to ask is "what monthly income must I have guaranteed for life, and how much of the capital do I want to leave flexible and liquid. An annuity provides security for life, an annona provides flexibility and control over the money. In most cases, the question is not what to choose but how to combine them."
How do you calculate the amount of the annona without running out of savings?
In a pension, the annuity is determined according to the amount we saved, the retirement coefficient, and the chosen safety nets. But when deciding to withdraw an annona, one can apparently choose any amount we want until the savings run out. There are several parameters that are taken into account: how much we saved, the planned life horizon, management fees, inflation, projected return, and current expenses. It is also recommended to keep a safety cushion for a large and unexpected expense.
"It is recommended to check the withdrawal amount at least once a year, and adapt it to the value of the savings, investment performance, and changes in needs. In a period of sharp declines in the markets, a high withdrawal may fix losses and significantly damage the life of the portfolio, so sometimes it is correct to temporarily reduce the withdrawal," explains Klein.
