Bereaved families could face “unconscionable” tax bills because of “chaos” in the civil service pension scheme, the government has been warned.
Some lump sum pension payments to families are only tax-free if made within two years of a scheme being told of the member’s death.
MPs are now voicing fears that severe delays in the administration of the civil service pension scheme, which is run by the outsourcing company Capita, could push some families over that threshold. They would then be hit with a tax bill calculated at the recipient’s personal rate.
The families of more than 1,600 deceased civil servants have been waiting for more than 100 days for their “death in benefit” claim to be processed, according to the latest figures. Some of those have reported struggling to pay bills because of the delay.
The Conservative MP Geoffrey Clifton-Brown, who chairs the Commons public accounts committee (PAC), said: “The chaos currently engulfing the civil service pensions scheme means that the likelihood of death benefit payments being made within two years is slim.”
He added: “It is unconscionable that the families of loyal and dedicated civil servants, who are continuing to suffer through this serious government failing, could potentially face such an unjust financial penalty.”
The Cabinet Office, which is responsible for the pension scheme, said it was unable to prevent HM Revenue and Customs from taxing delayed claims, and that affected members would have to claw back the money by taking their case to the Pensions Ombudsman.
The ombudsman estimates an 18-month wait to resolve cases because of the volume of complaints from those affected.
The PAC has called for a change in legislation to prevent relatives paying the price for administrative delays.
The government has already been accused of letting down civil servants and their families by repeatedly outsourcing the 1.7-million-member pension scheme to private companies that failed to deliver.
The PAC last year urged ministers to take the scheme in-house after a previous contractor, MyCSP, was blamed for plummeting service levels. However, the £239m contract passed to Capita last December, despite concerns voiced by some that the company was inadequately prepared.
The Cabinet Office said it was confident that Capita would offer an improved service. It has since acknowledged that service levels were “unacceptable”. MyCSP and Capita were contacted for a comment.
In February, a dedicated email address was set up for unions to escalate cases of severe hardship caused by the delays. The cases referred included claimants at risk of suicide or of losing their homes.
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Clare Norris has been waiting 11 months for the death benefit and pension payments she is due after her husband died last November.
“I was petrified – I am 52 and early death was not part of our financial plan,” she said. “Losing your partner is one of the most difficult experiences anyone can go through. The lack of clarity, communication and basic administrative handling from Civil Service Pensions has made it considerably worse.”
Capita said her case would be progressed under a new process. “It remains a high priority and the member can expect to hear on next steps as soon as possible.”
Under HMRC rules, in cases in which someone dies under the age of 75, tax-free lump sum payments must be made within two years, otherwise they will be taxed at the recipient’s marginal rate of tax.
The Cabinet Office said it was committed to ensuring scheme members were not left out of pocket. “We are continuing to hold Capita to account, including holding back nearly £10m in payments, and are doing everything in our power to ensure individuals do not experience delays,” said a spokesperson.
“If delays cause a tax charge, existing avenues for complaints can provide financial redress or compensation to cover losses.”
