Pensions minister Torsten Bell confirmed the rule change in a letter to the chairman of Parliament’s Public Accounts Committee, external, Conservative MP Sir Geoffrey Clifton-Brown, who had raised concerns about the issue after it was highlighted by BBC Radio 4’s Money Box Live programme.
Bell said the move would “make the position fairer for all grieving families and friends where there are delays in the payment of death benefits, whether in the Civil Service or any other pensions scheme”.
He added: “Removing the tax deadline does not remove [a pension scheme’s] wider duties to administer schemes prudently and without avoidable delay.”
Under the previous rules, if someone died before the age of 75, a pension lump sum death benefit was only tax-free if it was paid within two years of the pension scheme first becoming aware of the death, and if the value was below the deceased’s Lump Sum and Death Benefit Allowance.
However, the government has now removed the two-year deadline so payments will no longer become taxable solely because they were made more than two years after a pension scheme was notified of the death.
The change applies to payments made from 28 October.
In his letter, the pensions minister said people who had already been impacted by avoidable delays and been taxed as a result could seek compensation through the pension scheme’s complaints process and the Pensions Ombudsman.
Sir Geoffrey welcomed the announcement but said it does not “absolve Capita from processing and making payments to members of this scheme in a timely manner”.
Fran Heathcote, general secretary of the PCS union, also welcomed the change but said “this situation should never have arisen in the first place”.
She added: “Bereaved families must not pay the price for failures in the pension system.
“Capita is not off the hook, it continues to fail members and their families, which is why the scheme must be brought back in-house.”
Capita has previously apologised for the impact of delays on pension scheme members and their families.
The company has said it is working to resolve outstanding cases as quickly as possible, with a particular focus on people who have been waiting the longest and those facing financial hardship or challenging circumstances.
