As I was predicting the next round of cameras for release due in Feb and August, it is still a misunderstanding of "The more Megapixel the better it is" thingy. One of my favorite digital camera reviewing website is DPreview.com like some people here so some of the thoughts may still be subjective, but I have yet to find a site that have a standardised way to review digital cameras and show you the different results.
In 2003 Oct I bought a G5 (5MP), where it is a replacement for G3 (4MP). Canon skipped the G4 (4 is not a good word to use in Chinese so they skipped it). From G1 to G6 (the latest G series), all are built on a small sensor of 1/1.8". I did not realise this until I saw the G6 (7MP) with so much lower noise to the Canon Pro 1, which uses a 2/3" sensor (bigger than 1/1.8") from Sony, at 8MP.
The G5 at ISO 50 to 100 is smooth and near noiseless. The ISO 200 is also great but needs some noise removal using NeatImage but highly usable. The ISO 400 setting is horrible and almost too hard to fix without losing detail, hence my shooting are normally limited to ISO 50-100 and sometimes 200. It is a good thing to know that the G5 has a relatively fast lens to make up for that ISO 400 problem.
With the new G6, the sensor is probably made on a new process which I do not know (I am not an engineering student so forgive me in this aspect). Some people on Dpreview.com mentioned that why it is so good and low noise is due to the Digic II, but does G6 has Digic II processor? I think it is using the same Digic I processor. Why the G6 so much better than the Pro 1 even if they has the same/similar density count in terms of pixels per mm on the sensor? Probably like the CPU in AMD and Intel, the finer process (130nm to 90nm etc) allows the sensor to have more space in between among the thinly sillicon hence less noise when they become more sensitive (ISO400 etc). That might also be the reason for the 20D to have more MP but lower noise to an extend where ISO 1600 is pretty usable with post processing.
Where I need to print my pictures?
For a compact camera, most likely you will print 4R or at the most occasionally, S8R (12"x8") or 8R (10"x8"). Of course for larger prints you will see it further away at about 2 feet away, so I do not really think any normal person will be able to differentiate an S8R printed from 3600 x 2400 pixel than a resized 1800 x 1200 image. Life is short, spend more time with familiy members better than comparing picture details
For 4R you will need 1800 x 1200 pixels, meaning a 3MP (2000 x 1500+/-) camera will serve you well. A 4MP camera gives you 2300 x 1700 +/-, 5MP gives you 2550 x 1900 +/-. As you see, a normal shop prints at 300DPI max in most cases, therefore a 4R needs 1800x1200 which even a 3MP will be good enough. But it is harder and harder to find a good 3MP digital compact camera nowadays with the good functions we might need. A 4MP is still decent and up to date.
Many of the compact or ultra compact are built on a small 1/2.5" or 1/2.7" sensor, therefore putting more MP in it is not that good consider the G5 vs G3 story I mentioned earlier in this post. There are of course exceptions like the G6 but not easily found with the ultra compact today. Even the A95 that replaced (I suppose so?) the A85 needs a 1/1.8" sensor to the latter's 1/2.7", that tells a lot of story for that extra MP to noise reduction. Similarly the Ixus 500 has 1/1.8" sensor at 5MP to the Ixus 40 1/2.5" sensor.
A compact is used for snapping of photos, most likely prints on 4R and sometimes bigger prints. The next step up from 4MP is probably at 8MP (S8R at 300DPI) so buying a 4MP now will probably last you for a good 2-3 years (assuming it does not spoil during this time). Skipped those 5/6MP models and go for 7MP models on matured 1/1.8" sensor.
The above are my personal thoughts, so please correct if there mistakes. No flame please