However, the "financial repression" enforced by western governments over the past few years has pushed bond yields down to record lows and prices high.
This means there is little room for bonds to increase in value, with the only way being down. The market turmoil of the last few days has given bond investors a taste of what to expect in the coming months and years.
If it is no longer safe to keep your money in bonds, and they are not paying an income worth having, what should the investor facing retirement do to protect their capital and secure an income?
Advisers say that the first question for investors to ask is whether they want to buy an annuity or go for income drawdown.
The former course is the more traditional, but it has left many investors dissatisfied with their pensions in recent years.
Annuities are priced off gilt yields, which have been kept at record lows in recent years to keep government borrowing costs down.
This means that annuity rates – the amount you could get for your lump sum when you buy an annuity – are lower than they have been in the recent past. Someone buying an annuity is therefore effectively shifting their money into the bond market.
This is one good reason to go for the second option, whereby you leave your pension invested and take a part of the pot each year as income.
Bestinvest’s Jason Hollands (pictured) says that this is an option that is likely to appeal to more and more people as life expectancy gets longer.
"Generally, traditional asset allocation needs to be revisited as your retirement lasts much longer," he said.
"The retirement age broadly hasn’t shifted much in 50 years, but a lot of assumptions about bonds need to be re-examined."
"It used to be 'own your age in bonds', so if you were 50 you would have 50 per cent in bonds, and if you were 60, you would have 60 per cent, but as for if you want to pick an annuity, people often de-risk too quickly."
"If you have ISAs, if you shift into bonds at 65, you may live another 20 to 30 years, in which case you need some capital growth, so people de-cumulate too quickly."
"This is a time when bond yields are unattractive. I would be very nervous about lifestyling out of equities into bonds."
Hollands says that those investors who decide to buy an annuity should consider shifting into lower-risk assets as the purchase date draws near.
"If you are going to buy an annuity, they are ultimately driven off gilt yields, so if you are going to retire at 65 and your intention is to buy an annuity, you may want to take volatility out of the equation and move into bonds or cash, but if you are not in a hurry to buy, you may want to be invested," he said. Kerry Nelson (pictured), managing director of Nexus IFA, agrees.
"If you are going to purchase an annuity, you possibly need to be more conservative. You do not want to have to cash-in your funds at a time when the market has dipped."
"With markets as they are now, you cannot be too prescriptive. You don’t want to be exposed to the downside."
Hollands says that the portfolio of the typical investor on the verge if retirement will likely be made up of low-risk equity income funds, possibly a strategic bond fund and perhaps commercial property.
Equity income
There are six funds in the IMA UK Equity Income sector with both five FE Crowns and an FE Alpha Manager at the helm.
Neil Woodford’s Invesco Perpetual Income and Invesco Perpetual High Income are two of the most popular funds among UK retail investors, thanks to the manager's long-term record of success.
His funds are the first- and second-best performers out of the 56 funds in their IMA UK Equity sector over the past 10 years, according to data from FE Analytics, having returned 214.03 per cent and 255.47 per cent respectively.
Performance of funds vs sector over 10yrs
Source: FE Analytics
Some experts have concerns about the size of those funds – together they have more than £24bn in assets under management. For those people, Mark Barnett’s Invesco Perpetual UK Strategic Income fund, run with a similar process, could appeal.
Unicorn UK Income, a £159m portfolio run by John McClure, invests in smaller companies than the majority of funds in the sector, which could make it a useful diversifier.
The fund has the best returns in the sector over three- and five-year periods, having made 123.94 per cent over the longer time frame.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Threadneedle UK Equity Income is another top-rated fund, while Trojan Income has both five Crowns and an FE Alpha Manager at the helm, but is soft-closed.
Strategic bond
Jupiter Strategic Bond is the only portfolio in the IMA Sterling Strategic Bond sector with both five FE Crowns and an FE Alpha Manager in charge.
Ariel Bezalel’s £1.5bn fund sits second in the sector over five years, with returns of 71.12 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has ongoing charges of 1.5 per cent and requires an initial investment of £500.
Artemis High Income is managed by FE Alpha Managers Adrian Frost and Adrian Gosden and has four FE Crowns.
It has 70 per cent of its assets in bonds and a further 24 per cent in equities, meaning that investors need to take care it does not overlap with their stock holdings in other funds.
Fidelity Strategic Bond also has four FE Crowns and an FE Alpha Manager at the helm.
Commercial property
Hollands says that picking a property fund is difficult, but they provide valuable income and diversification benefits.
It is not possible to quickly sell out of property, so investors often prefer to go for closed-ended funds, as these do not have the liquidity constraints of open-ended funds, which need to keep a lot of cash on hand to return to investors if asked.
However, there’s a problem.
"Some of the best portfolios are ITs but they are trading on premiums, sometimes high premiums, so you should not buy at that level," Hollands said.
"We would go for Henderson UK Property. It’s a quality portfolio, 67 per cent in London or the south east."
Henderson UK Property is managed by Ainslie McLennan and Marcus Langlands Pearse. The £870m fund is currently yielding 4.5 per cent and has ongoing charges of 1.84 per cent. it requires a minimum investment of £1,000.
Hollands says that as time passes, investors should be looking to slowly reduce the equity exposure in their portfolio as growth becomes less relevant.
Nelson says that an investor’s attitude to risk will determine the mix of assets that is most appropriate to them.
"Clients going into drawdown are medium-risk, so can take more risk than others," she said.
She adds that this is a fluid process, and although deciding your attitude to risk is key, you need to be able to adapt to changing circumstances.
"You have to keep looking at your asset allocation to find how the market is changing," she said.
