Bereaved families could face 'unjust' tax bill after civil service pension delays

Bereaved families affected by severe delays paying out civil service pensions could face an "unjust" tax bill, the government has been warned.

Under HMRC rules, certain lump sum pension payments must be paid within two years of the pension scheme being notified of a death to remain tax-free.

Conservative MP Sir Geoffrey Clifton-Brown, who chairs Parliament's Public Accounts Committee, said it was "unconscionable" some families could face a "death tax" through no fault of their own.

The Cabinet Office said that if delays caused a tax charge there were existing avenues to claim compensation, such as the Pensions Ombudsman.

However, the ombudsman is currently advising that standard complaints are only likely to be resolved within 18 months, with more complex cases facing a longer wait.

The Civil Service Pension scheme manages the pensions of 1.7 million public sector workers in the UK.

Outsourcing firm Capita took over the administration of the scheme from a company called MyCSP in December 2025, saying it inherited a backlog of more than 86,000 cases.

Despite a two-year transition period to prepare for the takeover, problems have persisted and by February the backlog had grown to 120,000 cases.

Retired civil servants and bereaved families have been left waiting months for pension payments, with some struggling to pay bills.

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According to the latest figures up to 30 September, external, 1,643 outstanding cases of bereavement or death in service are more than 100 days old.

Of these, only 301 are in scope to be paid within 15 days.

The PCS union, which represents civil servants, said that while not all these cases would ultimately be affected by the two-year tax rule, there were "serious questions" over how long they would remain unresolved.

The Cabinet Office said that while the number of individuals approaching the two-year threshold was currently fewer than 10, "we are treating every case with urgency".

If someone dies before the age of 75, a pension lump sum death benefit is only tax-free if it is paid within two years of the pension scheme first becoming aware of the death, and if the value is below the deceased's Lump Sum and Death Benefit Allowance.

The payment would be taxed at the same rate as the beneficiary's income tax rate.

Sir Geoffrey has written to Cabinet Office Minister Louise Haigh to urge the government to confirm the bereaved families affected will not face this "unjust financial penalty".

His letter came after BBC Radio 4's Money Box Live highlighted the potential tax liability.

Sir Geoffrey said "the chaos currently engulfing the Civil Service Pension Scheme means that the likelihood of death benefit payments being made within two years is slim".

He warned "a significant number" of family members "will be watching the clock quickly tick down to a year, as the maladministration of the scheme enters its tenth month".

He added: "This is an additional stress they should not have to bear."

Writing in response to Sir Geoffrey's letter, Minister Sally Jameson said neither the Cabinet Office nor the pension scheme administrator had the power under tax law to alter or waive these tax charges.

However, she said where delays lead to an avoidable tax charge people "will not be left out of pocket" and the pension scheme "will ensure compensation is processed swiftly".

She added that the Cabinet Office was working with Capita to ensure the oldest outstanding cases were prioritised.

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Rob Wassell, 58, has been waiting almost two years for the lump sum from his brother's civil service pension, following his death.

On 22 October it will be two years since the pension scheme was notified of his death so if he does not receive the payment in just a few days times, it could face being taxed.

Rob, who contacted the BBC's Money Box programme about his case, said he had been phoning Capita with increasing "desperation" as his situation dragged on.

"It's a bitter pill to swallow to have to pay tax for something which was not my fault," he said.

"It creates unnecessary worry and anguish through the process, which is already in itself difficult."

Rob said he needed the money to cover the estate costs he had to pay for his brother and fill a £20,000 hole in his savings.

However, he said it was "heartbreaking" to hear of other cases where people needed the money just to survive.

Rob added that the idea that he might face "another battle" to recoup the tax through compensation made it feel like "you just want to give up".

Rob has been waiting almost two years for the lump sum from his brother's civil service pension