Chancellor John Healey. Kirsty O'Connor / No 10 Downing Street
The government will remove the two-year rule so that beneficiaries will no longer be taxable solely because tax-free pension and lump sum death benefits are paid more than two years after the member’s death.
The Budget document today (28 October) said the change will apply to any payments made on or after 28 October 2026 and will be introduced through Finance Bill 2026-27.
It also confirmed the government will make changes to the way tax is assessed and collected where a deceased member's lump sum death benefit allowance has been exceeded to provide greater certainty to individual beneficiaries.
The move comes after Cabinet Office minister Sally Jameson said that beneficiaries would not be left out of pocket should Civil Service Pension Scheme (CSPS) delays lead to avoidable death benefit tax charges.
Earlier this month, the chair of the influential House of Commons Public Accounts Committee Sir Geoffrey Clifton-Brown said it was with "disbelief" he learned the pension benefit payments for families of deceased civil servants could be taxed due to administrative delays at the scheme.
Under current rules, where a person dies under the age of 75, their heirs generally receive lump sums and other payments free of income tax as long as these lump sums are paid within two years of the notification of the death. If payment takes longer than this, income tax must be paid at the recipient's marginal tax rate.
Clifton-Brown said the "chaos" currently engulfing the CSPS meant the likelihood of death benefit payments being made within two years was "slim".
