The MOD have presumable done a cost v risk exercise. If they were to let the family go the whole way and claim for £10m then it would have involved a huge amount ion court costs and lost earnings from several MOD employees, and the total bill would be a lot more than the £10m. So the £5m is a 'fixed payment' to prevent having to pay any more.
Also if the family were (as has been suggested) considering private actions against teh individuals, then this £5m may prevent them from going down this route, therefore the MOD is actually paying out to protect its own. If this is the case then perhaps this is the best way forward to close the matter once and for all.
However, if this proves to be another case of a senior officer thinking he knows better than a properly conducted inquiry (of course , he is entitled to an opinion) and then forcing MOD to react thus making money out of it... then something really ought to be done.