An Irish Times guide to the world of personal finance

Property funds

In March 1999, I purchased some units in Irish Life Property Investment Fund III. At that time, there were no especially onerous conditions attached. In September of last year, the company introduced the new condition of six months notice to sell the funds at the price at the end of the six months. These conditions seem arbitrary and quite penal. I understand why they want to do it, but is it legal? If it is legal then is it ethical?

My daughter is getting married and I wish to use the invested money for her benefit. It is obvious that I am not a speculator but a six-month lag between deciding to sell and realisation of the assets is ludicrous. Taken to its logical conclusion, such powers held by the directors of Irish Life would make it possible for them to decide, at the whim of the board, that no funds could be encashed for three years after notice and with only 50 per cent of the original investment. Sounds like a form of economic tyranny. I'm sorry this is so long-winded and I'm fairly sure you are going to tell me that there is nothing that can be done - perhaps you could give me some contacts in the Central Bank or Investment Ombudsman (is there such person?) to whom I might complain to stop companies such as Irish Life behaving arbitrarily in the future.

Mr B.O., Dublin

First things first there is nothing illegal in the action that Irish Life has taken in relation to this property fund. In fact, as you probably suspect, it is covered in the terms and conditions of the fund to which you signed up. Secondly, Irish Life is not alone in the steps it took towards the end of last year in relation to its property funds. Many, if not all, Irish property funds adopted a similar stance.

It will come as no surprise to you to learn that the action was taken to root out speculative investors who had been targeting property funds in the expectation of quick profits. As a unit fund, the property funds are designed as medium- to long-term investments. The money in the fund goes into buying property and the fund gains by the capital appreciation and yield on these properties. This is fine when property values are rising, as they were doing for most of the 1990s.

At such times, property funds operate what is called an acquisition-based pricing policy. In simple terms, this is the situation that prevailed when you joined the fund in 1999. The emphasis within the fund is on acquiring property and, with rising prices, there is no concern about having the sell property to meet departing investors.

However, in the second half of last year, the tide turned and the market started contracting. Many brokers were advising their clients to shift out of property funds and this put pressure on funds who, although they all hold some funds in cash, would eventually be forced to sell property into a falling market, losing out in the process and so undermining the value of the fund.

As a result, the fund actuary, not the board of directors, advised a shift to a disposal-based pricing policy - a policy based on the premise that the fund may have to sell property to meet its cash requirements for departing investors. The six-month lag time allowed for in the terms and conditions of the fund gives the fund managers time to sell property as required without being forced into a fire sale, which would entail greater losses. There was also a once-off negative impact on the property funds - in the case of Irish Life, this was 7 per cent, a figure that would be reversed if and when the fund returns to a acquisition-based policy. Elsewhere, this charge was as high as 11.5 per cent.

The intent of the policy is, as you have guessed, to deter people from leaving the fund and, particularly, to deter speculators. Essentially, intending sellers are on a one-way bet with no chance to pull out of a decision to sell their funds and no way of knowing what the value will be in six months when the settlement is made.

Those affected by the change in terms in the case of the Irish Life funds are people who entered the property fund since September 1st, 1998, including people who may have switched into property funds since then from other Irish Life funds.

As a matter of interest, the actuary is constrained in making the decision. He does, after all, have a duty to act in the best interests of all the investors in the fund. If the actuary fails to deter speculators in a declining market, they run the risk of the ordinary investor losing out on the value of the fund by failing to be quick enough off the mark. In terms of the arbitrary nature of the time lag, the six months will have been set down in the small print. As such, the actuary could not arbitrarily decide to introduce, say, the three-year time lag to which you refer.

I know all this is little consolation to you but, ironically, it is due to the company's efforts to act ethically and in the interest of all the members. You have simply fallen victim to bad timing, always an issue when cashing in unitised investments.

SSIAs

I opened an SSIA account in March 2002. I know that you have to remain resident/ordinarily resident for the five-year term. As I would almost certainly leave the country in 2004, would I remain ordinarily resident for the tax years 2005, 2006 and 2007? In other words, wouldn't I break my SSIA by leaving the country in 2004? Otherwise, I would like to stop it now, to avoid any more losses due to the tax penalty. Please advise, as the Tax Office couldn't supply me with a clear answer.

Mr J.S., e-mail

The rule regarding ordinary residence is that you become ordinarily resident in the State after three tax years working here. In other words, it kicks in at the start of the fourth tax year of your stay. If you do qualify as ordinarily resident, you retain that status for three full tax years after the year in which you cease to be actually resident in the State. In other words, if you leave the State in 2004 and you are ordinarily resident at that time, you will continue to be ordinarily resident until the end of 2007 - long enough to cover the maturity of your special savings incentive account (SSIA).

As you say, getting this wrong could be expensive, so I see no reason why you would not get my opinion confirmed by an accountant versed in the residency rules.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.