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For the average UK consumer, a major disincentive to save through a pension is the perception that they will be forced to buy an annuity at some point.

Annuity rates have fallen in recent years, due to increasing average life expectancy and economic factors such as low long-term interest rates.

As a result, most consumers equate a 5% return on an annuity at 65 with other forms of saving and conclude it to be poor value compared to other options.

In addition, many believe that if they die early, the annuity provider takes their money as profit, when in fact most of it is shared among the remaining annuitants under the pooling principle of annuities.

In addition, under current legislation, annuity purchases can be deferred until age 75 and an income taken from the pension fund under the unsecured income rules.

Then, if a consumer still does not want to buy an annuity, an income can be taken from the pension fund using the alternatively secured pension (ASP) rules.

ASP was introduced as part of a raft of pension reforms last year, but only a few months later the government decided that anyone using an ASP would have their pension assets taxed at an effective rate of 82% on their death.

Another option is to use the scheme pension rules, which apply to certain types of pension and allow a scheme actuary to calculate how much income can be taken, based on the particular circumstances.

So you can probably see why most consumers don’t really understand their pension options and mistakenly believe that they have to buy a poor value annuity.

The government is clinging to the principle that pension should be used to pay an income on retirement, rather than being left as an inheritance and its rules attempt to enforce this.

But it has created much confusion, a fair degree of mistrust and a fertile area for savvy advisers to help high net worth clients keen to explore their options.

What is even more bizarre is that the ASP rules were originally drafted for the benefit of a religious sect, the Plymouth Brethren, who believe annuities represent a form of gambling and are therefore against their beliefs.

However, attempts to restrict ASP to a religious minority proved impossible, hence the penal tax charge.

It remains to be seen what the next twist in this convoluted saga is.

Some pension providers are now talking about setting up charitable trusts for their clients, so their pension assets can be passed on their death to a charity, as clients would prefer this to leaving it to the taxman.

Others think fixed term annuities or other innovations could have a role to play.

Finding a product to offer the security of an annuity with flexibility and attractive returns is the Holy Grail, but the quest for it is not helped by the lack of clear regulations.