End of the "two-year rule": bereaved families will not face tax over pension payment delays

Bereaved families will not face a tax bill just because a pension payment has been delayed. This follows rules announced in Budget 2026. HMRC published documents on the change on 28 October 2026.

What the two-year rule was

Until now, a pension scheme administrator had to pay tax-free death benefits to beneficiaries within two years of learning of the member's death. The rule applied to people who died before reaching 75. After that deadline, a payment could be taxed. Older government documents refer to a flat rate of 45% charged before the money reached the recipient.

Campaigners warned that some families could face an unfair financial penalty even though the delays were not their fault.

What is changing

The government has said it will remove this requirement in the Finance Bill 2026-27. According to HMRC, lump sum death benefits and beneficiary annuities paid from the deceased member's drawdown funds will stay tax-free after the two-year period. Administrators will no longer have to deduct and pay tax to HMRC solely because the deadline has passed.

The change also covers UK-resident beneficiaries receiving a pension from previously unassessed funds in the deceased member's foreign pension scheme. For them too, the two-year limit will disappear.

HMRC says the change should reduce the administrative burden on families. It should also remove time pressure during probate and other formalities after the death of a loved one. The Budget 2026 policy costings give 28 October 2026 as the start date for the measure.

Background: civil service pension delays

The issue has also been raised in Parliament. The chair of the Public Accounts Committee, Sir Geoffrey Clifton-Brown, responded to the Budget change on 28 October 2026. Earlier in the week, the House of Commons heard about reports that families could face severe tax consequences because of delays in death-in-service cases under civil service pensions. We could not retrieve the full BBC article or the committee's statement, so we do not describe those cases in detail.

What this means for you

The change applies to anyone who may inherit a benefit from a UK workplace or private pension, including people living in the UK who are not British. If a loved one died before the age of 75 and payment drags on, passing the two-year mark alone should no longer trigger tax. Families therefore do not need to rush through paperwork just because of that deadline. The usual rules on taxing benefits, including allowances, may still apply. In a specific case, it is worth asking the pension scheme administrator or a tax adviser.