Bereaved families spared pension tax bill as Budget ends two-year deadline

Bereaved families in the UK will no longer be hit by unexpected tax bills caused by severe delays in paying out civil service pensions, after the government changed the rules in Wednesday's Budget.

Under previous HMRC rules, certain lump sum pension death benefits stayed tax-free only if they were paid within two years of the pension scheme being told of a death. They also had to be below the deceased's Lump Sum and Death Benefit Allowance, and the person had to have died before the age of 75. Campaigners had warned that families could face an unfair financial penalty because of delays that were not their fault.

The government has now removed the two-year deadline, so payments will no longer become taxable solely because more than two years have passed since the scheme was notified of the death. The change applies to payments made from 28 October.

Backlog at Capita

The Civil Service Pension scheme manages the pensions of 1.7 million public sector workers in the UK. Outsourcing firm Capita took over its administration from a company called MyCSP in December 2025 and said it inherited a backlog of more than 86,000 cases. Despite a two-year transition period to prepare for the takeover, problems persisted and by February the backlog had grown to 120,000 cases.

Retired civil servants and bereaved families have been left waiting months for payments, with some struggling to pay bills. According to figures up to 30 September, 1,643 outstanding cases of bereavement or death in service were more than 100 days old. The Cabinet Office, which has overall responsibility for the scheme, has previously said only a small number of cases were approaching the two-year threshold, while the PCS union warned there were "serious questions" over how long cases would remain unresolved.

"A bitter pill to swallow"

Rob Wassell, 58, waited more than two years following his brother's death before finally receiving the lump sum from his civil service pension on Tuesday, after the BBC highlighted his case last week. Because the payment was made after two years it was taxed at 45%, amounting to thousands of pounds. He told the BBC he was pleased the government had addressed the issue so others would not face a tax bill, but called it "a bitter pill to swallow" as he waits for the outcome of a complaint review to find out whether the tax will be reimbursed. "I don't want to have to fight it anymore, it's been an ordeal already," he said.

Pensions minister Torsten Bell confirmed the rule change in a letter to Sir Geoffrey Clifton-Brown, the Conservative MP who chairs Parliament's Public Accounts Committee and who raised concerns after BBC Radio 4's Money Box Live highlighted the issue. Bell said the move would "make the position fairer for all grieving families and friends where there are delays in the payment of death benefits, whether in the Civil Service or any other pensions scheme". He added that removing the tax deadline does not remove a pension scheme's wider duties to administer schemes prudently and without avoidable delay.

People who have already been impacted by avoidable delays and taxed as a result can seek compensation through the scheme's complaints process and the Pensions Ombudsman. Sir Geoffrey welcomed the announcement but said it does not "absolve Capita" from processing and making payments in a timely manner. PCS general secretary Fran Heathcote also welcomed the change but said the situation should never have arisen, adding that bereaved families "must not pay the price for failures in the pension system" and that the scheme must be brought back in-house. Capita has previously apologised for the impact of delays and says it is working to resolve outstanding cases as quickly as possible, focusing on those waiting longest and anyone facing financial hardship.

Source: BBC Business.