Government announces removal of two-year rule on lump sum death benefits at Budget 26

The government announced in the Autumn Budget on 28 October 2026 that it will remove the two-year rule for pension and lump sum death benefits, so that beneficiaries are no longer taxable solely because a payment is made more than two years after the member's death¹. The change applies to payments made on or after 28 October 2026, regardless of when the member died, and will be introduced through Finance Bill 2026-27¹.

Under the previous rules, where someone died before the age of 75, lump sums and other payments were generally free of income tax only if paid within two years of the scheme administrator becoming aware of the death; if payment took longer, income tax was due at the recipient's marginal rate². The Budget document said the move would cost around £5m in the 2026-27 tax year and then £15m a year thereafter¹; HMRC estimates put the cost at £5m in 2026-27 and £15m annually over the following five financial years⁵. The government also confirmed it will change how tax is assessed and collected where a deceased member's lump sum death benefit allowance has been exceeded, to give beneficiaries greater certainty¹. The measure will also cover certain beneficiary annuities and overseas pension arrangements, while the existing lump sum and death benefit allowance rules continue to apply⁵. One report gives that allowance as £1,073,100⁶.

The change follows correspondence between the Public Accounts Committee and the government over the Civil Service Pension Scheme (CSPS). The committee's chair, Sir Geoffrey Clifton-Brown MP, wrote to the government on 14 October 2026 about tax and death benefit payments in the scheme⁷. On 19 October, Sally Jamieson MP, the minister responsible for the CSPS, responded, making clear that neither the Cabinet Office nor the scheme administrator has statutory discretion under tax law to alter or waive these tax charges⁷. On 28 October, Torsten Bell MP, the Minister for Pensions, wrote to the committee confirming the Budget change⁷.

The BBC reported that Capita took over administration of the CSPS from MyCSP in December 2025, saying it inherited a backlog of more than 86,000 cases, which had grown to 120,000 by February⁴. According to figures up to 30 September, 1,643 outstanding bereavement or death in service cases were more than 100 days old⁴. The scheme manages the pensions of 1.7 million public sector workers⁴. The BBC reported one case in which a lump sum paid after two years was taxed at 45%, amounting to thousands of pounds⁴. The pensions minister said people already affected by avoidable delays and taxed as a result could seek compensation through the scheme's complaints process and the Pensions Ombudsman⁴.

Why it matters for households

The rule change affects anyone receiving a pension lump sum or other death benefit from a member who died before age 75, in any pension scheme, not only the civil service scheme. For payments made on or after 28 October 2026, the tax charge no longer arises simply because more than two years have passed since the scheme was told of the death¹. The existing lump sum and death benefit allowance continues to apply⁵. Payments made before 28 October 2026 are not covered by the change; the BBC reported that a payment made days earlier was taxed at 45%⁴. Separately, most unused pension funds and death benefits are due to come within inheritance tax from April 2027⁵. Our guide to what happens to your pension when you die sets out the current rules, and what happens to pensions and investment accounts when someone dies covers the wider estate position.

What happens next

The change is to be legislated for through Finance Bill 2026-27¹. The Public Accounts Committee said it will continue to scrutinise the civil service pensions situation and its impact⁷. The government has not reported a date for the Finance Bill or for the changes to assessment and collection of tax on excess lump sum death benefits.