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.

7 ways to improve your retirement

7 ways to improve your retirement