Pension death benefit tax rules relaxed

The two-year time limit for paying tax-free pension death benefits is being removed. This means lump sum death benefits will no longer become taxable simply because they are paid more than two years after the pension scheme administrator first became aware of the member’s death.

The change applies where the member died before reaching age 75 and had sufficient remaining lump sum and death benefit allowance. It will also remove the two-year rule for annuity payments from a drawdown fund and money put into drawdown in pension schemes outside the UK following a person’s death. It will apply whether benefits are paid to an individual or to a trust or the deceased member’s estate.

Under the existing rules, benefits that would otherwise be tax-free can become taxable if the scheme administrator does not make the payment within two years of learning of the member’s death. This can result in tax being charged even where the delay is outside the control of the scheme administrator or beneficiary.

The change will remove this time pressure for bereaved families and reduce the administrative burden on pension scheme administrators, who will no longer need to monitor the deadline or deduct tax solely because it has been exceeded.

The new measure applies to payments made on or after the recent Autumn Budget on 28 October 2026.