UK Government Ends Tax on Delayed Pension Death Benefits

Bereaved families will no longer face a tax bill if pension schemes take longer than two years to process death benefits, following a change announced in the recent Budget. This measure aims to remove a tax burden on families experiencing delays beyond their control, particularly those affected by the ongoing civil service pension crisis.

The deadline for receiving pension death benefits tax-free for individuals who died under age 75 has been abolished as of October 28. The government stated that this change is expected to support grieving families by eliminating the risk of unfair tax outcomes and reducing time pressure during the probate process.

The change is projected to result in a £5 million reduction in tax revenue for the remainder of the current tax year and £15 million in subsequent years. Pension consultants have described the move as a welcome simplification, noting that the previous two-year rule often felt arbitrary, especially when delays were not the beneficiaries' fault.

Sir Geoffrey Clifton-Brown MP, chair of the Public Accounts Committee, welcomed the announcement, having previously protested the tax on death benefits for families of deceased civil servants at a time when processing delays were significant. He emphasized that while this change is positive, it does not absolve Capita, the current administrator of the Civil Service Pension Scheme, from its responsibility to process payments promptly. The committee will continue to scrutinize the crisis and its impact.

Capita has issued an apology for the frustration caused by the administration of the Civil Service Pension Scheme, acknowledging that members and their families have experienced significant delays. The company stated it is committed to resolving outstanding cases and improving the timeliness and reliability of its service, working closely with the Cabinet Office.

Previously, if death benefits exceeded the lump sum and death benefit allowance—currently £1,073,100—and were paid out more than two years after the death, they could be taxed as income or at a flat rate of 45% for trusts or estates. The abolition of this rule is seen as a positive step towards fairness and administrative simplicity for all parties involved.