Bereaved Families May Face Tax Bill Due to Pension Delays

Bereaved families awaiting civil service pension payouts could be liable for an "unjust" tax bill due to significant administrative delays, a Conservative MP has warned.

Under current HM Revenue and Customs (HMRC) rules, lump sum death benefit payments from pensions must be made within two years of the pension scheme being notified of a death to remain tax-free. Sir Geoffrey Clifton-Brown, chair of Parliament's Public Accounts Committee, has described the potential for families to face a "death tax" through no fault of their own as "unconscionable."

The Civil Service Pension scheme, which covers 1.7 million public sector workers, has experienced widespread issues since outsourcing firm Capita took over administration in December 2025. Capita inherited a backlog of over 86,000 cases, which had grown to 120,000 by February.

As of September 30, there were 1,643 outstanding cases related to bereavement or death in service that were more than 100 days old. Of these, only 301 were expected to be paid within 15 days. The PCS union, representing civil servants, has raised concerns about the unresolved cases and the potential impact of the two-year tax rule.

If a death occurs before the age of 75, the lump sum death benefit is tax-free only if paid within two years of the pension scheme's notification and if the amount is below the deceased's Lump Sum and Death Benefit Allowance. Payments exceeding these conditions are taxed at the beneficiary's income tax rate.

Sir Geoffrey has written to Cabinet Office Minister Louise Haigh, urging the government to ensure that affected families do not incur this financial penalty. The issue gained attention after BBC Radio 4's Money Box Live highlighted the potential tax liability. Sir Geoffrey stated that the "chaos currently engulfing the Civil Service Pension Scheme" makes it unlikely for death benefit payments to be made within the two-year window, potentially affecting a "significant number" of families.

Rob Wassell, whose brother died two years ago, is awaiting a lump sum payment. He faces the prospect of the payment being taxed if it is not received by October 22, the two-year anniversary of the pension scheme being notified. Wassell expressed his distress at the possibility of paying tax for an issue beyond his control, adding that the prospect of seeking compensation for this tax felt overwhelming.

Fran Heathcote, head of the PCS union, called it a "profound injustice" if families faced additional financial penalties due to Capita's administrative failures. A spokesperson for the Cabinet Office acknowledged that the service levels have been "completely unacceptable" and committed to ensuring no member is left financially worse off. The department is withholding nearly £10 million in payments from Capita and is working to resolve delays. The spokesperson also noted that existing complaint avenues, such as the Pensions Ombudsman, can provide financial redress or compensation for losses incurred due to delays, although the ombudsman currently estimates resolution times of at least 18 months for standard complaints.

Capita has previously apologized for the impact of service issues and stated it is working to resolve outstanding cases. The company has been contacted for comment.