Bereaved families spared tax bills over pension delays after Budget rule change

Bereaved families will no longer face unexpected tax bills because of severe delays in paying out civil service pensions, under a 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 removed the deadline, meaning payments will no longer become taxable solely because more than two years have passed. The change applies to payments made from 28 October. Pensions minister Torsten Bell confirmed the move 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 change 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 change comes amid long-running problems at the Civil Service Pension scheme, which manages the pensions of 1.7 million public sector workers. Outsourcing firm Capita took over the scheme's administration from MyCSP in December 2025, inheriting a backlog of more than 86,000 cases despite a two-year transition period. By February, the backlog had grown to 120,000 cases, and retired civil servants and bereaved families have been left waiting months for payments, with some struggling to pay bills. According to the latest figures up to 30 September, 1,643 outstanding cases of bereavement or death in service are more than 100 days old. The Cabinet Office, which has overall responsibility for the scheme, previously said only a small number of these cases were approaching the two-year threshold. However, the PCS union warned there were "serious questions" over how long cases would remain unresolved. One person affected was Rob Wassell, 58, who waited more than two years after his brother's death before receiving the lump sum from his civil service pension on Tuesday. After his case was highlighted by the BBC, he received a call from the scheme's complaints department saying the payment was on its way. Because it was made after the two-year deadline, it was taxed at 45%, amounting to thousands of pounds. Had it been made after the rule change, it would not have been subject to tax. Wassell said he was pleased the government had addressed the issue so others in his situation would not face a tax bill, but described the tax deducted from his own payment as "a bitter pill to swallow". He is now waiting 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. In his letter, the pensions minister said people who had already been taxed as a result of avoidable delays could 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 to members of this scheme in a timely manner". PCS general secretary Fran Heathcote also welcomed the change but said the situation should never have arisen in the first place. "Bereaved families must not pay the price for failures in the pension system," she said, adding that Capita "is not off the hook" and calling for the scheme to be brought back in-house. Capita has previously apologised for the impact of the delays and said it is working to resolve outstanding cases as quickly as possible, focusing on those who have waited the longest or are facing financial hardship.