The army game

By THIS IS MONEY
Updated:

 

MY sister is in the armed forces and has few assets except her gratuity from the army. She completes 22 years service in October 2002.

She has asked me to lend her my life savings of £20,000 with

interest, which she will repay from her gratuity in six years when she leaves the army. She has offered me her gratuity as security. I am prepared to lend the money but feel I need security, particularly as she is married, to ensure that I get the money if she dies, rather than to her widower.

How do I take a legal charge on the gratuity to ensure I get my money back? Is it legal to take a charge on an armed forces gratuity? What is the difference between a gratuity and a pension? And how do I set a fair interest rate on the loan? AJ.

Lee Robertson, independent financial advisor at Investment Quorum, says: As a member of the armed forces your sister is accumulating pension entitlement based upon her length of service and pay scale (which normally excludes any specialist pay).

After 22 years, your sister accumulates her pension at an increased rate. This is why the 22-year point is important to servicemen and women in relation to their pension rights.

At retirement your sister will receive a pension and a tax-free lump sum of three times her annual pension. Ignore the term gratuity and just think in terms of a pension and a tax-free lump sum. It is the tax-free lump sum that could be used to repay you the money you are considering lending her.

• There are some points to consider:
It is not possible to take a charge or lien against a pension, particularly not a public sector pension scheme such as the Armed Forces Pension Scheme.

• You are correct in your assumption that should your sister die the widowers benefit would be paid to her widower and/or children and not to any other individual.

• I would suggest that you consult a solicitor and have a specific arrangement drawn up setting the interest rate and repayment period and terms. This should go some way to providing the protection you require. Whatever your final decision I would suggest that before giving away the use of your whole life savings that you consult a solicitor or an independent financial adviser as to the potential pitfalls.

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