The government has removed the two-year tax deadline on lump sum pension death benefits following severe delays in the Civil Service Pension scheme, which had left some grieving families facing unexpected tax charges of up to 45%.
BBC Politics
Bereaved families will no longer face unexpected tax bills caused by severe delays in paying out civil service pensions, under a rule change announced in Wednesday's Budget.
Under previous HMRC rules, certain lump sum pension payments had to be made within two years of a pension scheme being notified of a death in order to remain tax-free. Campaigners had warned that some families could face an unfair financial penalty because of delays that were not their fault.
The government has now changed the rules so that payments will no longer become taxable solely because more than two years have passed. Pensions minister Torsten Bell confirmed the change in a letter to Sir Geoffrey Clifton-Brown, the Conservative chairman of Parliament's Public Accounts Committee, who had raised concerns after the issue was highlighted by BBC Radio 4's Money Box Live programme.
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.
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 MyCSP in December 2025, inheriting 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 the latest figures, covering the period up to 30 September, 1,643 outstanding cases of bereavement or death in service were more than 100 days old. The Cabinet Office, which holds overall responsibility for the scheme, previously said only a small number of these cases were approaching the two-year tax threshold, while the PCS union had warned there were "serious questions" over how long cases would remain unresolved.
The change applies to payments made from 28 October. People already affected by avoidable delays who were taxed as a result can seek compensation through the pension scheme's complaints process and the Pensions Ombudsman.
One such case was Rob Wassell, 58, who waited more than two years after his brother's death before receiving a lump sum from his civil service pension on Tuesday. His case was highlighted by the BBC last week, after which he received a call from the scheme's complaints department telling him the payment was on its way. Because it was made after the two-year deadline, it was taxed at 45%, costing him thousands of pounds. Had the payment been made after the rule change, it would not have been subject to tax.
Wassell welcomed the Budget change, saying others in his situation would now be spared a tax bill, but described his own experience as "a bitter pill to swallow" as he awaits the outcome of a complaint review to determine whether the tax will be reimbursed. He said he was hopeful of getting the money back, adding: "I don't want to have to fight it anymore, it's been an ordeal already."
Sir Geoffrey welcomed the announcement but said it did not "absolve Capita from processing and making payments to members of this scheme in a timely manner". Fran Heathcote, general secretary of the PCS union, also welcomed the change but said "this situation should never have arisen in the first place". She added: "Bereaved families must not pay the price for failures in the pension system. Capita is not off the hook, it continues to fail members and their families, which is why the scheme must be brought back in-house."
Capita has previously apologised for the impact of the delays on scheme members and their families, saying it is working to resolve outstanding cases as quickly as possible, with a particular focus on those who have waited the longest and those facing financial hardship or challenging circumstances.