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Pension death benefits: two Budget 2026 changes for bereaved families

Published29 October 2026
Reading time3 min read

Good news for bereaved families

Budget 2026 made two changes that make pension death benefits simpler when someone dies before 75.

Pension death benefits for bereaved families

When someone dies before age 75, their pension can usually be paid to their family tax-free. This is called a lump sum death benefit. Two rules made this harder than it needed to be. The Budget fixed both.

These changes are about income tax on the payment. They are separate from the inheritance tax change in April 2027.

The two-year rule has gone

From 28 October 2026, a late payment is no longer taxed just because it is late.

Before, the payment had to be made within two years of the pension scheme learning of the death. If it was paid later, it became taxable, even when nobody was to blame for the delay. Payments to a trust or estate faced a flat 45% charge.

That rule is removed for payments made on or after 28 October 2026. It also goes for income paid to a family member from the deceased’s drawdown fund.

Delays are common. A scheme may struggle to trace the right person, or several family members may need to agree. Under the old rule, a payment that missed the deadline by a few weeks could lose a large part of its value to tax.

Large lump sums: simpler tax

Tax-free death benefits have a limit of £1,073,100 per person. The Budget simplified how tax is collected above it.

Anything paid above the limit is taxed at the beneficiary’s own rate. But schemes pay out before anyone knows whether the limit has been passed. Under the old approach, the extra was treated as the beneficiary’s pension income, which could reopen their tax and benefits years later.

Now HMRC will charge it separately. It sets the rate, but does not count as income for other tax or benefit purposes. This applies to payments made since 6 April 2024.

In practice, this means a beneficiary who receives a large payment will not find their Child Benefit, personal allowance or other entitlements affected by it. Only people with very large pensions are likely to be caught by the limit.

What this means for your family

For most families, these changes remove stress at a hard time.

Less time pressure. Executors and families do not need to rush pension claims during probate.
Fewer refunds. Fewer people should need to claim back tax paid in error.
No tax return. Beneficiaries told about tax on a large lump sum do not need to add it to Self Assessment.

Read our guide to probate for the wider process.

Keep your pension wishes up to date

Pension schemes decide who receives your pension, guided by the wishes you give them.

Your will does not usually control your pension. It is worth checking who your provider has on file after:

marriage, a civil partnership, separation or divorce
a new child or grandchild
the death of someone you named
moving jobs, which can leave old pensions with old wishes

Make sure your executors know where your pensions are held. For questions about how your pension fits with your will and estate plan, speak to us.

How PJH Estate Planning can help

PJH Estate Planning can review your will, LPAs and tax plans against the latest rules. Start with our free Estate Health Check: 10 quick questions that show any gaps in your plans. You can visit our offices, or we can visit you at home.

Sources

General information as at October 2026. Not legal, financial or tax advice.