Bereaved families will no longer face unexpected tax bills due to significant delays in civil service pension payouts, following a change announced in the UK's recent Budget. Previously, HM Revenue and Customs (HMRC) rules stipulated that certain lump sum pension payments had to be made within two years of the pension scheme being notified of a death to remain tax-free. Campaigners had raised concerns that families could incur unfair financial penalties because of these non-fault delays.
The government has now amended these rules, meaning payments will not become taxable solely due to the passage of more than two years. This change applies to payments made from October 28.
The Civil Service Pension scheme, which administers pensions for 1.7 million public sector workers, has experienced significant administrative backlogs. Capita took over the scheme's administration in December 2025, inheriting a backlog of over 86,000 cases. Despite a two-year transition period, issues have persisted, with the backlog growing to 120,000 cases by February.
This has led to prolonged waits for payments for retired civil servants and their families, with some struggling to meet financial obligations. As of September 30, figures indicated 1,643 outstanding bereavement or death-in-service cases were more than 100 days old. The Cabinet Office, responsible for the scheme, had previously stated that only a small number of these cases were approaching the two-year tax deadline.
Rob Wassell, 58, experienced this issue firsthand, waiting over two years for his brother's civil service pension lump sum. After his case was highlighted by the BBC, the payment was expedited but was taxed at 45% because it fell outside the two-year window. He expressed relief that the government has addressed the issue, preventing others from facing similar tax liabilities. Wassell is now awaiting the outcome of a complaint review to determine if the tax will be reimbursed, calling the ordeal a "bitter pill to swallow."
Pensions Minister Torsten Bell confirmed the rule change in a letter to the chairman of Parliament's Public Accounts Committee, Sir Geoffrey Clifton-Brown. Bell stated the move 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 also emphasized that removing the tax deadline does not absolve pension schemes of their duty to administer funds prudently and without avoidable delay.
Under the prior rules, pension lump sum death benefits for those dying before age 75 were tax-free if paid within two years of the scheme being notified and if the value was within the deceased's Lump Sum and Death Benefit Allowance. The removal of the two-year deadline addresses the primary concern regarding taxability due to administrative delays.
Sir Geoffrey welcomed the announcement but stressed that 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, echoed this sentiment, calling for the scheme to be brought back in-house and stating that "Capita is not off the hook, it continues to fail members and their families."
Capita has previously apologized for the impact of delays and is working to resolve outstanding cases, prioritizing those who have waited the longest and are facing financial hardship. The minister's letter also indicated that individuals already taxed due to avoidable delays can seek compensation through the pension scheme's complaints process and the Pensions Ombudsman.