Bereaved families will no longer face a tax bill if a pension scheme takes longer than two years to pay out death benefits following a loved one's death. The Government abolished the two-year rule in its Budget on October 28, removing what had become an unfair tax burden on families experiencing delays beyond their control, particularly those affected by the civil service pensions crisis.
Under the previous rules, death benefits that missed the two-year deadline would be taxed as income for individuals or at a flat rate of 45 per cent for trusts or the member's estate, even when delays arose through no fault of the beneficiaries. Families whose loved ones died before age 75 will now receive tax-free payouts provided the payment falls within the £1,073,100 lump sum and death benefit allowance. The Government expects the change to cost £5 million in lost tax for the rest of the current tax year and £15 million in subsequent years.
The reform addresses particular hardship in the civil service pension scheme, where members and their families have endured months or years of delays following a meltdown in administration. Capita took over management of the scheme from MyCSP in December and has faced parliamentary scrutiny over slow processing. Sir Geoffrey Clifton-Brown, chair of the Public Accounts Committee, had protested about the two-year rule in a letter to the Government earlier this month, expressing disbelief that the Government intended to tax death benefits when the administrative chaos made two-year payouts unlikely.
Pension consultants and financial advisers welcomed the change as both fairer and administratively simpler. LCP said the rule had always seemed arbitrary and its abolition was a welcome simplification. David Brooks, head of policy at Broadstone, noted that beneficiaries could previously face different tax outcomes simply because administration took longer, adding that the reform improves both fairness and simplicity. Alex Pugh, chartered financial planner at Saltus, described it as a welcome fix sparing grieving families an unexpected tax bill.
Capita apologised for the frustration caused by the scheme's administration, acknowledging that behind every outstanding case is a person waiting for the pension they are entitled to receive or a family seeking support during a difficult time. The company said it has made progress but there is still much to do, with teams working to resolve outstanding cases as quickly as possible, particularly focusing on those who have waited longest and those facing financial hardship.
For savers and their families, this means bereaved relatives will no longer face unexpected tax charges on death benefits simply because pension administrators took longer than two years to process payouts.