Bereaved families will no longer face tax hit if pension benefits take too long to process

Updated: 12:35 EDT, 30 October 2026 Bereaved families will no longer be hit with a tax bill if a pension scheme takes longer than two years to process death benefits.The deadline to take benefits tax-free if your loved one died aged under 75 was axed in the Budget this week.The move will remove a tax burden on families experiencing long delays to payouts that are beyond their control – including those caught up in the civil service pensions crisis.Civil service pensioners and grieving relatives have faced hardship after being deprived of incomes and lump sums for months or years, following a meltdown at the scheme.Abolition of the tax time limit was welcomed by Sir Geoffrey Clifton-Brown MP, chair of the Public Accounts Committee, who had protested about it in a letter to the Government earlier this month.He expressed 'disbelief' the Government intended to tax death benefits for families of deceased civil servants, at a time when the chaos engulfing the scheme meant payments being made within two years was slim. Death benefits: The 'two year rule' imposing a crucial deadline on families is liftedMPs have held hearings lambasting Capita, which took over the civil service pension scheme from previous administrator MyCSP last December.Clifton-Brown said regarding the lifting of the tax deadline: 'This is a welcome announcement from Government that I hope will go some way to reassuring civil service members caught up in an avoidable crisis that should never have escalated to this degree.'This announcement is not to absolve Capita from processing and making payments to members of this scheme in a timely manner. Our committee will continue to scrutinise this ongoing crisis and its impact closely.'A Capita spokesman said: 'We are deeply sorry for the frustration that the administration of the Civil Service Pension Scheme has caused members and their families.' Read its full statement below.How are death benefit tax rules changingThe 'two year rule' imposing a crucial deadline on families waiting for death benefit payouts was lifted starting on the day of the Budget, October 28.Families whose loved ones die before age 75 will no longer face a tax charge, provided the payment falls within their lump sum and death benefit allowance, which is £1,073,100.Previously, even when breaching the deadline was not the beneficiary's fault, the death benefits would be taxed as income for an individual, or at a flat rate of 45 per cent for a trust or the estate of the member who died.The Government said of its move: 'The measure is expected to support bereaved families by removing a risk of unfair tax outcomes following bereavement, and by removing a source of time pressure during probate or other administration relating to the death of a family member.'It expects to take in £5million less tax in the rest of this tax year and £15million in subsequent years as a result of the change.Pension consultant LCP said: 'This will mean that tax-free pension and lump sum death benefits will no longer become taxable solely because the two-year rule is missed.'The rule has been around for a long time but always seemed arbitrary. Its abolition is a welcome simplification, especially with inheritance tax to apply to certain death benefits from April.'David Brooks, head of policy at financial consultancy Broadstone, said: 'Beneficiaries could face different tax outcomes simply because it took longer than two years to identify beneficiaries, resolve disputes or complete the administration of a death benefit case.'This is one of those reforms that should be welcomed on its own merits. Death benefit cases are often among the most sensitive and complex matters schemes deal with, and the previous rules could produce outcomes that felt difficult to justify where delays arose through no fault of the beneficiaries involved.'The change is therefore a rare example of a reform that appears to improve both fairness and administrative simplicity, and is likely to be warmly received by trustees, administrators and members alike.'Alex Pugh, chartered financial planner at wealth manager Saltus, said: 'Removing the two-year rule is a welcome fix that will spare grieving families an unexpected tax bill simply because a pension payout was delayed while an estate was settled.' What does Capita say? We are deeply sorry for the frustration that the administration of the Civil Service Pension Scheme has caused members and their families, the company said in a statement.We know that behind every outstanding case is a person waiting for the pension they have worked for and are entitled to receive, or a family trying to get support at an already incredibly difficult time.We have made progress. But there is still a lot more to do and the service is still falling short for members. Our teams are completely committed to getting this right and are putting everything they can into resolving these issues.They are working tirelessly to resolve outstanding cases as quickly as possible, with particular focus on people who have been waiting the longest and those facing financial hardship or challenging personal circumstances.There is nothing more important to us right now than the administration of this Scheme. 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