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Annuities are an anomaly in the financial services; the only product that government forces consumers to buy - at age 75 - and which converts a life's hard-earned pension savings into a retirement income that is fixed for as long as that individual lives.

The UK annuity market was worth £11bn in 2007, with 400,000 contracts sold, and is expected to grow by 20 per cent each year to be worth £30bn within five years.

As Britain heads into its first epoch of over-50s outnumbering young people in the population, the rather staid annuity space is also undergoing great change, spear-headed by new providers entering the 'at retirement' insurance market.

While the open market option has been about since 1978, a renewed push by the FSA to encourage consumers to take up their open market option has put the concept back on the agenda. Yet, confusion still seems to surround it.

The open market option is the right for a pension policyholder to review all of the at retirement products available to them, including all annuity types, on the open market and then to source the best rate offered for that product. Because it represents a statutory right to consumers, theoretically an individual could exercise the open market option and still conclude after that process that they wish to accept the annuity product and rate proposed by their existing policy provider.

However, in two-thirds of cases consumers are baffled by the terminology of an open market option and simply opt for whatever their policy provider suggests, which some campaigners and new entrants claim costs them thousands of pounds in missed opportunity.

David Harris, sales and marketing director of Living Time, a new entrant which specialises in alternative annuities, said that many people – including those within the industry – seem to believe that the open market option is simply about the ability to shop around for the best rate of one product: a lifetime annuity.

He said: "The industry needs to challenge itself to rapidly improve the dismal fact that after many years of trying, only one-third of consumers exercise their open market option. Equally shocking, more than 90 per cent of pensioners end up in a lifetime annuity, a product that was launched in the UK at the start of the last century and offers clients no flexibility for their changing health or general circumstances in what can be 25 years-plus in retirement. These are surprising statistics given there are at least seven different choices available at retirement."

These choices include conventional, enhanced, impaired and fixed-term annuities, which are investment-risk free, and with-profit, unit-linked, variable annuities, phased retirement and drawdown.

This month, Living Time will launch its open market option awareness campaign, dubbed offer more options, which will be targeted at the government, the FSA, trustees, IFAs, the pension regulator and the wider industry.

Stuart Bayliss, director of Annuity direct, a specialist annuity adviser based in London, said there are standard questions that those approaching retirement should ask themselves: "What type of pension income do I want? What type am I eligible for [for example, smokers can access impaired lifetime annuities]? And what is the best rate for that available for that product? None of these things are possible if they do not exercise their open market option."

Mr Bayliss believes that the open markeet option should be the default option for all, something which forces people to actively opt into the annuity product proposed by their pension provider if they so wish. Dr Ros Altmann, an independent policy and investment issues adviser, is enraged at what she calls "a gross dereliction of duty" by life companies and the government, which keep consumers baffled.

She said: "Getting the right annuity can make a huge difference to hundreds of thousands of people who buy one each year. For example, many men do not realise their partner will be left with nothing unless they buy a 'joint-life' annuity, which partly explains why so many single, older women are in poverty. Many of those buying annuities could be entitled to a much better rate due to past health issues, often getting at least 30 per cent more. Yet nobody tells them and the government does nothing to ensure they know about this."

Jonathan French, assistant director of media relations for the ABI, said that it is in the process of introducing a standardised letter for its members to send to consumers, outlining the full scope of open market options, but insists that it will take a while before "it starts to have a positive affect in the market".

Tom McPhail, head of pensions research for Hargeaves Lansdown is not convinced. He believes the ABI is a partisan lobbying group which operates to protect the interests - and shareholders - of the large 'old guard' insurance companies. He said: "There is a mounting exasperation with the big insurance companies. The smaller insurance companies are really hacked off with the fact that the ABI acts purely in the interests of larger, 'old guard' who are quite happy with the status quo. The reality is that a lot of these big insurance companies have built into their pricing an assumption that they can sell uncompetitive annuities to their customers. If those customers all started using their open market option, they would have some real profitability issues, some real shareholder issues."

Be that as it may, change is certainly coming. The Treasury is due to report its conclusions on the implementation of the open market option in November's pre-Budget report and with the FSA bringing to bear treating customers fairly regulations across the board, there is hope that old, consumer-detrimental practices are on the verge of overhaul.

An outrage to Dr Altmann is that in some cases commission is paid on annuity products even where no advice has been given. If a consumer opts to buy an annuity from their existing pension provider, 1 per cent to 2 per cent commission is deducted from their pension pot to either pay as trail commission the adviser that some decades earlier arranged the pension policy, or siphoned into the insurance company's coffers. No dual pricing presently exists for annuities, yet the possible introduction of customer-agreed remuneration may thwart the practice.

Another bugbear for advisers and consumers alike is the length of time some providers take to transfer funds to another annuity provider as a consequence of the open market option being exercised. Living Time last year claimed that some providers take up to six months to release the funds – by cheque rather than electronic transfer – and with no legislative or regulative imperative bearing down on this process, the incentive simply is not there.

Mr Bayliss says that within his firm's client bank, on average clients have two or more pension policies which if combined would make them eligible for an annuity purchase with a much larger value than if seen in isolation, as he believes the ABI and FSA do. With standardised forms of discharge, improved processes and basic advice, he believes that even policies of £5000 could be profitable business for all concerned.

Mr McPhail takes a tougher line: "The answer is simple: make the open market option the default, simplify the paperwork, and if they don’t release investor funds within five days, fine them until their share price suffers; that would bring [life insurers] into line."

Anna Lawlor is senior features writer for Financial Adviser