Bereaved families risk unfair tax charge as civil service pension delays persist

The government has been warned that families waiting for civil service pension payments could be hit with an “unjust” tax bill because of prolonged processing delays. Under HMRC rules, lump‑sum death benefits must be paid within two years of the pension scheme being notified of a death to remain free of tax.

Conservative MP Sir Geoffrey Clifton‑Brown, chair of the Public Accounts Committee, called it “unconscionable” that bereaved relatives might face a “death tax” through no fault of their own. He wrote to Cabinet Office minister Louise Haigh urging confirmation that families will not be forced to pay the charge.

The Cabinet Office says that if a delay results in a tax liability, existing routes such as the Pensions Ombudsman can provide compensation. However, the ombudsman now advises that standard complaints may take up to 18 months to resolve, with more complex cases taking longer.

The Civil Service Pension Scheme, which serves 1.7 million public‑sector workers, was transferred to outsourcing firm Capita in December 2025 after being run by MyCSP. Capita said it inherited a backlog of more than 86 000 cases, and despite a two‑year transition period the backlog grew to 120 000 cases by February. Retired civil servants and families of the deceased have been left waiting months for payments, with some struggling to meet bills.

Figures up to 30 September show 1 643 outstanding bereavement or death‑in‑service cases that are more than 100 days old, of which only 301 are expected to be paid within 15 days. The PCS union, which represents civil servants, noted that while not every case will be affected by the two‑year tax rule, there are serious concerns about how long they will remain unresolved. The Cabinet Office says fewer than ten individuals are currently approaching the two‑year threshold and that each case is being treated with urgency.

If a civil servant dies before age 75, the lump‑sum death benefit is tax‑free only if it is paid within two years of the scheme first learning of the death and if the amount is below the deceased’s Lump Sum and Death Benefit Allowance. Otherwise the payment is taxed at the beneficiary’s income‑tax rate.

Sir Geoffrey’s letter followed a BBC Radio 4 Money Box Live segment that highlighted the potential tax liability. He 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 that a “significant number” of families will see the clock tick down as the scheme’s maladministration enters its tenth month, adding, “This is an additional stress they should not have to bear.”

In response, Minister Sally Jameson said neither the Cabinet Office nor the pension‑scheme administrator can change or waive tax charges under the law. She added that if delays cause an avoidable tax charge, people “will not be left out of pocket” and that compensation will be processed swiftly. The Cabinet Office is working with Capita to prioritise the oldest outstanding cases.

Money Box Live featured Rob Wassell, 58, who has been waiting almost two years for the lump‑sum from his brother’s civil service pension. The two‑year deadline falls on 22 October, and if the payment does not arrive shortly, it could become taxable. Wassell told the programme he has been calling Capita with growing desperation. “It’s a bitter pill to swallow to have to pay tax for something which was not my fault,” he said, noting that he needs the money to cover estate costs and a £20 000 shortfall in his savings. He described the prospect of having to fight for a tax refund as “heart‑breaking” and said it makes him want to give up.

Fran Heathcote, head of the PCS union, called it “a profound injustice” if families are forced to pay a further financial penalty because of Capita’s failures. “If that does happen, the government should be ashamed that families are being made to pay the price for failures that are entirely outside their control,” she said.

A Cabinet Office spokesperson acknowledged that service levels since the move to Capita have been “completely unacceptable” and pledged to ensure no member is left financially worse off, adding that Capita will continue to be held to account.