Bereaved families will no longer face unexpected tax bills because of delays in receiving civil service pension payouts, after the government changed tax rules in Wednesday's Budget. Under the previous rules, certain lump sum pension payments had to be paid within two years of a pension scheme being notified of a death to remain tax-free. The government has now removed this two-year deadline so that payments will no longer become taxable solely because more than two years have passed since notification of the death.
The Civil Service Pension Scheme, which manages pensions for 1.7 million public sector workers, has faced severe processing problems since outsourcing firm Capita took over its administration in December 2025. Capita inherited a backlog of more than 86,000 cases and despite a two-year transition period, problems persisted. By February, the backlog had grown to 120,000 cases. According to the latest figures up to 30 September, 1,643 outstanding cases involving bereavement or death in service are more than 100 days old.
Rob Wassell, aged 58, waited more than two years following his brother's death before receiving a lump sum from the civil service pension. Because the payment was made after two years, it was taxed at 45 per cent, amounting to thousands of pounds. Wassell told the BBC that under the new rules his payment would not have been subject to tax. He said he was pleased the government had addressed the issue but described it as "a bitter pill to swallow" as he awaits the outcome of a complaint review to determine whether the tax will be reimbursed.
Pensions Minister Torsten Bell confirmed the rule change in a letter to Conservative MP Sir Geoffrey Clifton-Brown, stating 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". People who had already been impacted by avoidable delays and taxed as a result can seek compensation through the pension scheme's complaints process and the Pensions Ombudsman. Sir Geoffrey welcomed the announcement but said 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, also welcomed the change but said "this situation should never have arisen in the first place". She added that bereaved families must not pay the price for failures in the pension system and called for the scheme to be brought back in-house. Capita has previously apologised for the impact of delays and said it is working to resolve outstanding cases as quickly as possible, with particular focus on those waiting longest and those facing financial hardship.