The measure, announced as part of the 2026 Budget, removes a deadline that could previously trigger tax charges on inherited pension funds. It is intended to reduce administrative pressure on bereaved families and prevent delays beyond their control from affecting the tax treatment of payments.
HMRC Removes Two-Year Deadline for Tax-Free Pension Benefits
Under the previous rules, pension schemes generally had two years from learning of a member’s death to pay qualifying lump sum death benefits without triggering a tax charge. This applied where the pension holder died before reaching the age of 75.
According to HMRC’s policy paper, published on 28 October 2026, the government is removing that requirement so that qualifying payments can remain tax-free even when the two-year period has passed.
The change applies provided the deceased member had sufficient lump sum and death benefit allowance remaining. It covers payments to individual beneficiaries as well as payments to trusts or the deceased member’s estate.
Previously, payments made beyond the deadline could be taxed as pension income. Where beneficiaries were individuals, tax was deducted through PAYE. Payments to certain non-individual recipients, including trusts and estates, could attract a 45% tax charge.
The revised rules also cover beneficiary income withdrawals and annuity payments from the deceased member’s drawdown funds. Funds designated into drawdown, including certain arrangements involving overseas pension schemes and UK-resident beneficiaries, are included.
The government confirmed that the measure applies to payments made on or after Budget Day 2026, with legislative amendments to be introduced through Finance Bill 2026–27.
Changes Aim To Ease Pressure on Families Facing Pension Delays
The decision addresses situations in which pension payments were delayed despite neither the beneficiaries nor pension administrators having control over the circumstances.
According to the government, removing the deadline is intended to make the system fairer while reducing the administrative burden associated with pension death benefits.
Families dealing with probate or other arrangements following a death will no longer face the same tax consequences solely because a qualifying payment takes longer than two years.
HMRC also expects the measure to reduce the number of beneficiaries who need to contact the department to reclaim tax that has been overpaid.
The financial implications have been outlined in the Budget documents. The estimated cost to the Exchequer is £5 million in 2026–27, followed by £15 million annually from 2027–28 through 2031–32.
The changes are expected to have a negligible administrative impact on approximately 4% of pension schemes that pay lump sum death benefits.
Administrators may face one-off costs associated with staff training, reviewing guidance and becoming familiar with the revised requirements. Ongoing savings are expected because schemes will no longer need to monitor the two-year deadline or deduct tax solely because it has passed.
According to HMRC, the measure is not expected to have significant macroeconomic effects or require changes to its IT systems or staffing resources.
The reform removes a specific tax deadline rather than changing the amount of pension death benefits payable, which schemes must still distribute under the applicable arrangements.
