The taxing of civil service pensions delayed beyond two years will no longer continue under new rules announced in the Autumn Budget.
Previously, HMRC regulations stipulated that when a person died before the age of 75, beneficiaries would be charged tax on pensions and death benefits that are delayed over two years from the date the pension scheme were notified of the person’s death.
However, under new rules, the two-year deadline ceases to exist from the date of the budget onwards and therefore payments from the Civil Service Pension scheme – which handles approximately 1.7 million pensions of public sector workers – made from this date will not pay tax.
This change will save bereaved families up to £45,000 on a £100,000 payout, the government estimates.
While the two-year deadline has been vetoed, income tax will still be levied on pensions when a person has died after the age of 75 and these changes do not affect inheritance tax.
Pensions minister Torsten Bell confirmed the rule change in a letter addressed to the chair of the committee of public accounts, Sir Geoffrey Clifton-Brown, last Wednesday when the Budget was announced.
Bell acknowledged concerns raised about “the impact that administrative delays can have on bereaved families, particularly where a benefit becomes taxable because payment was not made within the statutory two-year period”.
Confirming the change, he said: “The Government has removed the two-year deadline for pension and lump sum death benefits to be paid tax-free where the member died before age 75.
“Under the change, payments made on or after 28 October 2026 will no longer become taxable solely because more than two years have passed since the pension scheme first knew, or could reasonably have been expected to know, of the member’s death.
“The existing requirements relating to the deceased member’s age and availability of Lump Sum and Death Benefit Allowance will continue to apply.”
Bell added: “The change will apply to payments made from 28 October 2026, including payments relating to deaths that occurred before that date.
“It will therefore protect beneficiaries awaiting payment when the change takes effect. Trustees and scheme administrators will, however, remain responsible for identifying beneficiaries and settling benefits promptly. Removing the tax deadline does not remove their wider duties to administer schemes prudently and without avoidable delay.”
The pensions minister noted that the change “will not reopen the tax treatment” of payments made prior to Budget announcement.
However, where a beneficiary considers there has been an avoidable delay by a pension scheme administrator which has led to a financial loss, Bell urged they should “pursue the matter” through the administrator’s complaints scheme or where necessary the Pensions Ombudsman.
This was not the only change to pensions announced within the Autumn Budget, with John Healey confirming that as of April next year, pension pots will contribute to inheritance tax calculations.
