A £1 million pension isn't as much as you'd think

Piggy bankHow much tinkering can one area of pensions stand? Successive governments change the pensions rules as often as they make dodgy expenses claims and one part of pensions has suffered the most.

The lifetime allowance has dropped from a rather substantial £1.8 million in 2012 to a less impressive £1.25 million today. And in its party manifesto set out before its conference this weekend, the Lib Dems want to chop it further to £1 million.

Before you saw 'a million quid is plenty' and 'who saves that sort of money', the answer could very well be; you.

With the advent of auto-enrolment, people will now be saving from the age of 22 up to retirement, which could well reach 70 very soon, that's nearly 50 years of saving.

With wage increases in line with inflation factored in, it's not inconceivable that those on reasonable professional wages could save £1 million.

Tom McPhail from Hargreaves Lansdown pointed out that a lifetime allowance of £1 million would mean the maximum retirement income a person would be able to save for would be £37,000 (that's accounting for inflation).

Although that sounds like a lot to some people, especially those who don't earn that now, it's not a horrifically high or unattainable number to aim for.

The biggest problem, however, is not the figure it's the actual tinkering itself. Every time the lifetime allowance is reduced a protection has to be put in place to ensure those who have already saved the limit, or nearly have, are not penalised.

Confidence in the pension system is already pretty low and auto-enrolment is slowly building that back up but it won't be successful if on one hand you are encouraging people to save but on the other you are putting a lid on what they can put away for their old age.

It's a classic case of the left hand not knowing what the right hand is doing.

As McPhail said, reducing the lifetime allowance sets a low bar for savers' retirement ambitions. In an age where the government wants people to take responsibility for themselves it's doing a damn fine job of putting them off doing anything at all.

I agree with McPhail that all political parties should agree not to mess around with pensions for at least five years. In fact, I think pensions should be taken out of the political equation altogether and dealt with by a cross-party pension panel, but that discussion is for another day.

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A £1 million pension isn't as much as you'd think

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

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