Families waiting for a lump sum following the death of a pension scheme member will no longer lose tax-free treatment solely because payment takes more than two years. According to the BBC, the government has removed that deadline for payments made from 28 October 2026. The other conditions for tax exemption remain in place.
Under the previous rules, a payment following the death of someone aged under 75 could be tax-free if it was paid within two years of the scheme being notified of the death and fell within the deceased member’s available Lump Sum and Death Benefit Allowance. This allowance covers certain pension lump sums and death benefits. Missing the deadline could therefore trigger a tax charge even when a family’s wait was caused by administrative delays.
The BBC reports that pensions minister Torsten Bell confirmed the change in a letter to Sir Geoffrey Clifton-Brown, chair of Parliament’s Public Accounts Committee, which scrutinises public spending. Introduced in Wednesday’s Budget, the change applies not only to the Civil Service Pension Scheme but also to other pension schemes.
Tax change does not clear the backlog
The decision comes against a backdrop of delays at the Civil Service Pension Scheme, which covers pensions for 1.7 million public sector workers in the UK. According to the BBC, Capita took over administration from MyCSP in December 2025 and said it had inherited more than 86,000 outstanding cases.
Figures cited by the BBC show that, as at 30 September 2026, 1,643 cases involving a member’s death or a death in service had been waiting more than 100 days. Capita previously apologised for the impact of the delays and said it was working through the backlog, prioritising those who had waited longest and people in difficult circumstances.
Removing the deadline reduces the risk of tax consequences from a lengthy wait, but does not itself speed up payments. According to the minister’s position reported by the BBC, administrators remain responsible for running schemes efficiently and avoiding unnecessary delays.
What about tax already paid?
The new rules apply to payments made from 28 October 2026. They do not create a blanket tax exemption for all pension benefits or mean that tax deducted from earlier payments will automatically be refunded.
The minister said people who had previously paid tax because of avoidable delays could seek compensation through their pension scheme’s complaints procedure and the Pensions Ombudsman, which handles pension complaints and disputes. The opportunity to seek compensation does not, however, guarantee an award.
