Diversifying portfolios is standard practice – so why don’t we diversify retirement income?

Rethinking retirement income: expert insights series

To support advisers as retirement planning continues to evolve, we invited Mark Ormston, Chief Compliance Officer at Retirement Line, to write a series of articles examining how annuities and guaranteed income solutions are being used in today’s evolving retirement landscape. Drawing on real‑world adviser and customer experience, the series explores how retirement income strategies are adapting to changing markets, regulation and customer priorities.

This article challenges the dominance of single‑product retirement income strategies and considers whether retirement income should be diversified in the same way as investment portfolios. Mark Ormston examines how combining drawdown with guaranteed income solutions can help manage longevity, sequencing and market risk.

Diversifying portfolios is standard practice – so why don’t we diversify retirement income?

Diversification is one of the most fundamental principles in financial advice. Advisers spend decades helping clients construct portfolios spread across asset classes, geographies, investment styles and wrappers to reduce risk and meet clients’ needs as they accumulate assets.

Yet when those same clients reach retirement, diversification often only remains with their investments, rather than using different retirement income products to reduce their specific decumulation risks. Instead of a mix of complementary retirement income products, many retirees rely almost entirely on one solution: drawdown.

From an annuity broker’s perspective, that presents a curious contradiction. While advisers instinctively diversify investments, they rarely diversify the mechanisms used to generate retirement income.

The rise of the single-product retirement strategy

Since the introduction of pension freedoms in 2015, drawdown has of course become the dominant pension income option in the UK, especially for advisers. The appeal is obvious: flexibility, investment control and the potential for tax-efficient intergenerational wealth transfer (until next year!).

But the consequence is that many retirement plans now rely entirely on investment performance to generate income in an increasingly volatile market environment.

This exposes retirees to three risks simultaneously:

• Investment risk – income depends on market returns.
• Sequencing risk – early market downturns can permanently damage sustainability.
• Longevity risk – there is no guarantee the income will last for life.

Ironically, these are exactly the kinds of risks that a well-constructed retirement plan should mitigate. The answer is available through the diversification of retirement income products.

Diversifying retirement income

A more balanced retirement strategy is to have a combination of lifetime annuities, fixed-term annuities and drawdown.

In simple terms, annuities can provide the secure foundation of a retirement plan, either for life or for a specific term that’s appropriate for the client’s needs, while drawdown provides growth and flexibility.

Many retirees have a clear split between:

• Essential expenditure – housing, food, utilities, insurance etc.
• Discretionary spending – holidays, hobbies, luxury purchases, dining and entertainment etc.

Using annuities to cover core spending transforms the structure of a retirement portfolio from a probability-based approach to a safety-first approach.

Rather than using sophisticated cash flow modelling systems and back testing through 100 years of history to predict the probability of failure, the plan has 100% probability to provide the essential income. The remaining pension assets can remain invested in drawdown with a longer-term growth mindset.

This changes the investment dynamic entirely. Instead of being forced to generate stable income from the portfolio, drawdown assets can be invested more efficiently for growth, volatility can be tolerated more easily, and sequencing risk becomes less threatening.

In other words, annuities provide stability so drawdown can do what it does best: grow capital.

The market may be rediscovering annuities

While annuity sales collapsed following pension freedoms, there are signs of renewed interest. The latest figures from the ABI show that annuity sales are at their highest since the pension freedoms were announced, with sales of £7.4bn in 2025 ¹.

The biggest increases came from customers with larger pots. Sales of annuities over £250k rose by 31%, and sales of annuities over £500k rose by 54% ¹.

Higher gilt yields have significantly improved annuity rates and the guaranteed income they can provide. At the same time, market volatility and longevity concerns are prompting advisers to reconsider how they should structure retirement income.

From inheritance vehicle to income engine

The 2027 IHT changes could accelerate a broader reframing of pensions and greater diversification of retirement income products.

Instead of acting primarily as an intergenerational wealth transfer tool, pensions may increasingly revert to their original purpose: providing income in retirement.

To give a very basic example using the current Retirement Living Standards, a minimum retirement income for a single person is £13,400 per year (this excludes housing costs such as rent or mortgage). The current State Pension for 2026/2027 is £12,548.

This leaves a gap of £852 per year. Assuming the client pays tax at the basic rate in retirement, they require an additional annual income of £1,037.50.

I appreciate that advised clients will typically want a living standard in excess of £13,400. However, the focus here is on essential expenditure. As part of the fact-find process, the adviser will be able to determine the value of their client’s essential expenditure.

Using current annuity rates for a 66-year-old (the current State Pension age), topping up the State Pension to the minimum retirement income would require an annuity purchase of £21,102. That would buy a guaranteed annual income stream of £1,037.50, rising with RPI for life.

Your client can then feel secure and confident that no matter what lies ahead, they will always be able to “pay the bills” and will never run out of money. At the same time, they can enjoy the flexibility and growth potential that drawdown offers.

And of course, many clients may want to boost their guaranteed income beyond the minimum shown in the Retirement Living Standards, and way beyond in some cases.

For example, the annuity portion of their income may be set in place to cover further regular expenditure beyond the bare essentials. Maybe an annual cruise or funding their motoring costs? (Interestingly, the Retirement Living Standards’ minimum income level assumes just one week-long UK holiday a year and no car ownership.)

Retirement defaults

The pension schemes bill is currently progressing through parliament. A lot of focus has been on the consolidation of workplace pension providers to those with assets of over £25bn. However, the bill also requires providers to offer retirement defaults to customers.

All workplace pension providers are currently designing their default journeys. Many are suggesting a mix of products, but at different life stages rather than as a portfolio, commonly called ‘flex then fix.’

The flex is an invested solution until age 75 or 80. The fix is an annuity, and at current rates, a healthy 80-year-old could see annuity rates of 11%. Many will receive more than this due to their health and lifestyle qualifying them for enhanced rates.

As time progresses, clients will become accustomed to blended options. The benefit to advised clients is that this blend could be provided at the point of creating the retirement plan, rather than at an age the pension provider sets, which may not be appropriate for the client.

Rethinking retirement construction

A decade on from pension freedoms, the industry has become comfortable talking about flexibility. The next phase of retirement planning may require a more balanced conversation about risk management.

Diversifying retirement income across different products – just as advisers diversify investments – may prove to be one of the most effective ways to manage the uncertainties retirees face.

For many clients, the optimal solution is unlikely to be all drawdown or all annuity. The answer, as is often the case in financial planning, lies somewhere in between.

Summary

At Aviva, we see diversification as central to effective retirement planning. A balanced approach that combines flexibility, growth potential and income certainty can help advisers build strategies aligned to different spending needs and risk profiles. This article reinforces the case for a more holistic construction of retirement income.

Source:

¹ Annuity sales overall and sales of large value annuities: Larger pension pots drive record-breaking year for individual annuity premiums. ABI, 12 February 2026.