Bereaved families will not face tax bill over pension delays under new rules
Campaigners had warned some families could face an unfair financial penalty because of delays which were not their fault.
Bereaved families will no longer face an unexpected tax bill because of major delays in paying out civil service pensions, after a change announced in Wednesday’s Budget.
Under the previous HMRC rules, certain lump sum pension payments had to be made within two years of the pension scheme being told about a death in order to stay tax-free.
Campaigners had warned that some families could be unfairly penalised financially because of delays that were not their fault.
The government has now altered the rules so payments will no longer become taxable simply because more than two years has passed.
The Civil Service Pension scheme looks after the pensions of 1.7 million public sector workers in the UK.
Outsourcing company Capita took over administration of the scheme from MyCSP in December 2025, saying it had inherited a backlog of more than 86,000 cases.
Even with a two-year transition period to prepare for the handover, problems have continued, and by February the backlog had risen to 120,000 cases.
Retired civil servants and bereaved families have been left waiting months for pension payments, with some struggling to cover bills.
1,643 outstanding bereavement or death-in-service cases are more than 100 days old.
The Cabinet Office, which has overall responsibility for the Civil Service Pension Scheme, had previously said only a small number of these cases were nearing the two-year limit.
But the PCS union, which represents civil servants, warned there were "serious questions" about how long cases would remain unresolved.
Rob Wassell, 58, had to wait more than two years after the death of his brother before finally receiving the lump sum from his civil service pension on Tuesday.
After his case was reported by the BBC last week, Rob said he received a call from the pension scheme’s complaints department telling him the payment was on its way.
However, because it was paid after two years, it was taxed at 45%, costing thousands of pounds.
If the payment had been made after the rule change, it would not have been taxed.
Rob told the BBC he was glad the government had dealt with the issue in the Budget, because it would mean others in his position would not face a tax bill.
Although he said he was relieved to finally receive the payment, it was "a bitter pill to swallow" because he is now waiting for the result of a complaint review to learn whether the tax will be repaid.
Rob said he hoped he would get the money back, adding: "I don't want to have to fight it anymore, it's been an ordeal already."
Pensions minister Torsten Bell confirmed the rule change in a letter to the chairman of Parliament’s Public Accounts Committee, Conservative MP Sir Geoffrey Clifton-Brown, 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: "Removing the tax deadline does not remove [a pension scheme's] wider duties to administer schemes prudently and without avoidable delay."
Under the old rules, if someone died before the age of 75, a pension lump sum death benefit was only tax-free if it was paid within two years of the pension scheme first learning of the death, and if its value was below the deceased’s Lump Sum and Death Benefit Allowance.
The government has now removed the two-year deadline, so payments will no longer become taxable solely because they were made more than two years after a pension scheme was notified of the death.
The change applies to payments made from 28 October.
In his letter, the pensions minister said people already affected by avoidable delays and taxed as a result could seek compensation through the pension 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".
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 effect of delays on pension scheme members and their families.
The company says it is working to clear outstanding cases as quickly as possible, with particular attention on people who have been waiting the longest and those facing financial hardship or difficult circumstances.