ChatGPT's Role in Financial Planning: Potential and Limitations

Planning your retirement? ChatGPT can help with that

Ever wondered if you can afford to take early retirement? Traditionally, you might have engaged a financial adviser to help explore your options. This week, I've been talking to one reader who's been using ChatGPT instead. Unlike the 12mn Britons estimated to be in the "advice gap", 58-year-old Jim can afford to pay for regulated financial advice. With a £2mn defined contribution pension entirely invested in global equities, he has a further £850,000 in liquid assets (primarily fixed income) plus a £2.5mn home. He turned to generative AI out of curiosity, but the results surprised him so much, he shared them with me. So how worried should advisers be? Jim provided ChatGPT with a synopsis of his financial position stating his desire to retire at 60, asking: "Do I need to change the profile of my DC pension fund when I retire?" Within seconds, it generated an easy-to-read three page summary identifying that Jim's central dilemma was managing a sequence of returns risk -- the danger that a market downturn early in his retirement will reduce his portfolio's longevity, especially if he's drawing an income from age 60. It listed the pros and cons of keeping his pension fully invested in equities; moving to a more balanced 60:40 portfolio of equities and bonds or adopting a "bucket strategy" with three years' income in cash, 5-10 years in moderately risky investments and the rest in equities for long-term growth. Next, it urged Jim to explore his cash flow needs, noting his large fixed income pot meant he could afford to keep his pension more aggressively invested, and the longevity risk of a 30-plus year retirement was flagged. Not bad -- but the next heading of "recommendation" made me gasp. Would anyone rely solely on the word of an unregulated chatbot? This concluded Jim should gradually de-risk and reassess his position annually, though the "final tips" section (with a yellow warning icon) did say "consult a financial adviser before making any changes". And just as well, as ChatGPT's confident assertion that DC pensions are outside your estate for inheritance tax purposes will not be true when the law changes in 2027. The AI then prompted Jim to see if he'd like to see a projection of his income in retirement under different drawdown and asset allocation scenarios, and a Monte Carlo simulation duly appeared. Wow. How about playing around with healthcare cost assumptions? Tempting -- but he had now hit the free usage limit and would have to pay $20 per month to continue. "Maybe this is the new cost of financial advice," he says. The information Jim surfaced in 15 minutes was nothing that he couldn't have found online with a few hours of dedicated Googling. But AI's ability to summarise and distil this speedily into a personalised jargon-free report, with added interactive prompts, was impressive. I'm relieved that Jim now intends to seek advice from a fully regulated human being, but advisers think his ChatGPT experience will have been a great primer for this. David Hearne, a chartered financial planner at FPP, thinks that someone who starts with a question in ChatGPT is more likely to end up speaking to an adviser than someone who asks no questions at all. "The more informed someone is when they come to us for advice, the better," he says. However, Hearne and other advisers were quick to point out AI's limitations. When drawing up a financial plan, they would ask broader questions about Jim's health, his family circumstances and estate planning goals, plus his likely income needs in retirement and how to sequence these in the most tax-efficient way. "What the AI doesn't say -- yet -- is 'I can't answer this until you tell me that'," says Hearne. Much rests on an individual's prompting skills, though the ability to ask: "What haven't I asked that other people in similar circumstances have done?" is a tantalising possibility. "Despite AI's obvious risks, it's still a heck of a lot better than some TikToker saying you can retire at 40 if you pay for his trading strategy," says Adam Walkom, co-founder of Permanent Wealth Partners. Like many others, his financial planning firm already uses AI tools to streamline admin, transcribe and generate action points from client meetings, and help visualise analysis of client portfolios. Advice firms are most definitely alive to developing their own AI-powered advice generating models in future, but cautiously await more guidance from the financial regulator. "The typical adviser oversees 100 clients," Walkom says. "If someone started a firm providing AI-enabled advice that was sanity checked by a qualified adviser, maybe they could oversee 1,000 clients." With regulatory blessing, this could open up a much lower cost advice model, though he stresses protecting and anonymising client's financial data would be "the absolute starting point". For its part, the Financial Conduct Authority is keen to explore AI's potential. It launched a tie-up with Nvidia this week, creating a "supercharged sandbox" for financial services firms to experiment with AI in a controlled environment. Just one of the ways it is helping firms navigate AI adoption, the FCA intends to apply its existing regulatory framework to AI rather than create an additional one. But just as it is clamping down on finfluencers, does the regulator need to better protect consumers who are already turning to generative AI? As an experiment, I asked a more mass market question -- what should a 50-year old woman earning £30,000 with a £80,000 DC pension do to better prepare for retirement? I was served a fantastically useful summary referencing the PLSA's retirement living standards to estimate what income I'd need; told to check my state pension forecast; shown examples of how much more I'd need on top to close the gap and given a link to the government's MoneyHelper pension calculator to work this out. Although I wasn't told that I could sign up for a free Pension Wise appointment, which provides guidance from a qualified professional, doing all of the above would have made me much better prepared for one. Generative AI clearly has the potential to transform financial education and deepen consumer engagement, but it is not infallible. Although I think the pros massively outweigh the cons, the backstop of qualified human guidance is very much needed. Seeing the ease with which my 20-something stepchildren interact with AI chatbots on their phones, their generation may end up better prepared for retirement than mine. But that's assuming AI doesn't put us all out of a job.

Hey AI! Can ChatGPT help you to manage your money?

We asked a chatbot some common finance questions - and then ran its responses past human experts Artificial intelligence seems to have touched every part of our lives. But can it help us manage our money? We put some common personal finance questions to the free version of ChatGPT, one of the most well-known AI chatbots, and asked for its help. Then we gave the answers to some - human - experts and asked them what they thought. We asked: I am 35 years old and want to ensure I have a comfortable retirement. I earn about £35,000 a year and have a workplace pension, in which I have saved £20,000. My employer contributes 4% of salary. I would like to retire at 60 and want to ensure I have enough in my pension pot to not worry about money later in life. Do I need to save more? ChatGPT said*: A comfortable single-person retirement requires roughly £43,000 a year of spending (in today's money) while a moderate lifestyle might need £31,000 a year. Covering £43,000 a year over a 20- to 30-year retirement implies a very large pension pot of about £793,000 in addition to the state pension. A moderate £31,000 a year needs £478,000 in savings. Your state pension will kick in at 67 and is about £12,000 a year, much less than the £43,000 needed for comfort and it does not arrive until seven years after you retire. This "pre-state pension gap" could well exceed £150,000. You must plan to fund all expenses for seven years on your own savings. Even optimistic growth leaves you well below the £500,000 to £800,000 needed. You'll need to save more - much higher than 9%. Vanguard [an investment adviser] suggests saving 12% to 15% of your pay a year (including employer contributions). Legal & General offers a rule-of-thumb savings percentage of half your age: at 35, that means 17.5% of your salary. Since your employer already gives 4%, you might target 11%. Don't forget UK tax relief: your 20% basic-rate relief effectively makes every £80 you save cost you only £60 net. Consider topping up with a lump sum or contributing to a stocks and shares Isa. Read ChatGPT's full answer here Steve Webb, a partner at the pension consultants LCP, says: Using the Pensions and Lifetime Savings Association (PLSA) standard for a "comfortable" and moderate income seems a reasonable place to start. For someone aged 35 today, the state pension age by law will be 68 (and could be higher by the time they get there) so the reference to 67 in the reply is incorrect. The PLSA says you need £43,000 a year after tax, so that implies a pre-tax income of very roughly £50,000; you get £12,000 a year of this from state pension age, but for the first eight years of retirement (before the state pension kicks in) you would need this to come from your pension pot. This means you will need £635,000 on current calculations. The figure of £793,000, therefore, looks over the odds, though there may be an assumption (not made explicit) that a quarter is always taken in tax-free cash. The person using AI needs to understand what assumption has been made around tax-free cash to clarify what is going on. It is good the AI explains that in the first years of retirement you are relying solely on your private pension pot, a kind of basic "cashflow modelling" many advisers would do as standard. The rules of thumb are a decent starting point, although the one about saving at a percentage which is half your age is for people who only start saving at that age. One omission is that there is no reference to the possibility of an additional employer match. Some firms will pay more if you pay more, and that would make additional workplace saving much more attractive than the suggested alternative of an Isa. Another omission is that if you buy an annuity at 60, you may want to think about things such as inflation protection, and these would increase the size of pot you needed to target. I don't think it's a bad reply aside from the error on state pension age. But you would want to go deeper in terms of understanding the assumptions made. We asked: We have 20 years left on our mortgage and our current rate is due to run out in a few months. The loan to value is about 50%. What are the best rates on the market? Should we go for a two-year or five-year fix? Or should we stay put and hope that that rates come down? ChatGPT said: The very cheapest two‑year fixes are about 3.7% to 3.8% and five‑year fixes are about 3.8% to 3.9% for borrowers with large deposits. With 50% equity you should qualify for the lowest-rate tier. For example, Lloyds Bank has a two‑year fix at 3.72%. These often have arrangement fees (typically £999) so factor them into any calculation. For five‑year fixes, Lloyds offers 3.78%. If you did nothing, your mortgage would revert to the lender's standard variable rate, which are typically much higher - about 7-8%. An SVR can jump if rates rise, and lenders are not required to pass on cuts in full. If you expect further rate cuts, a two‑year deal lets you refinance again sooner at (hopefully) lower rates. The downside is more frequent remortgaging: after two years, you'll need another deal. Five-year deals are likely to be a few tenths higher but give peace of mind for longer and protect you if market rates jump or stay elevated. If stability of repayments is your priority, a five‑year fix is often recommended. Most analysts expect further modest cuts - economists at Barclays predicted the bank rate could fall to 3.5% by early 2026. That could push mortgage offers down further, but likely not to the ultra-low levels seen pre-2020. Many experts lean toward taking a fixed rate now (especially to avoid the very high SVR) and revisiting options after a year or two. Read ChatGPT's full answer here David Hollingworth of the broker L&C Mortgages says: This response is not even close to the level of advice that a qualified adviser would provide. What it does provide is a quick spin around some of the things that have been going on in the market, along with a general overview of elements the borrower may want to think about. The AI response is a bit of a mishmash and veers from quite specific information, such as specifying the Lloyds rate, to more general observations. Aside from the fact that this deal is now defunct, it also required the borrower to be a current account customer. Criteria will be as much a factor for many borrowers as the deal itself. It does highlight that there's an arrangement fee to factor in, but borrowers need to understand there are options that can reduce or remove those costs, which could work much better for someone with a smaller mortgage. It feels a bit mixed about what may or may not happen with rates - the bottom line is that none of us know and, as far as I know, that includes AI. Because it was asked about two- and five-year rates, it fails to consider whether another option could fit better. An adviser would take a borrower through that, which could open up something like a three-year deal, fixing for 10-plus years and the existence and pros and cons of variable rate deals, too. The response may give some food for thought to borrowers and help them consider the questions they want to cover with a human adviser. Most borrowers will have had a browse online of "best buy" deals and coverage of what's happening in the market before seeking individual advice. ChatGPT may offer another way to drag a very general summary together quickly as part of that research. We asked: I have two children (12 and 15), both of whom are in secondary school. Both want to go to university when they finish school. What is the best way for me to start saving and how much will I need to put together? They will be going to university in the UK. Can they get student loans? How much will accommodation cost us? ChatGPT started with details of the government loans for tuition and living costs and when they need to be repaid. It says these children would qualify for the minimum maintenance loan of between £3,907 and £6,853 depending on where they work and study. It then said: It's wise to start saving now with dedicated education savings. Junior Isas allow up to £9,000 a year for each child in tax-free savings or investments. Any growth is tax-free, and funds are released when the child turns 18. Even small regular deposits (eg £50-£100/month) into a Jisa, or a high-interest children's savings account, can add up. Other options include premium bonds, a stocks and shares Isa (higher risk, higher potential return), or simply a regular savings account in the parents' name. Consider investments for long-term growth: index funds or diversified portfolios can beat savings rates, though with risk of loss. It added that you should encourage children to save and to check for bursaries and scholarships. Read ChatGPT's full answer here Charlene Young, a senior pensions and savings expert at AJ Bell, says: It did a decent job of spelling out the facts of how much uni could cost, and the probable level of loan that could be applied for. It falls short on explaining the differences that would help someone make the right decision for their circumstances. A discussion with a real person would involve questions asking for extra information to give a more comprehensive answer. When saving or investing for children, we often talk about putting on your own oxygen mask first, such as checking you have a cash buffer or emergency fund for those unexpected costs. I'd want to double check that you don't have any unsecured, high-interest borrowing outstanding - the AI answer doesn't really explain that, starting from an assumption your own finances are in good shape. A pot such as a junior Isa makes sense for a specific goal such as university costs, but that money is locked away until the child turns 18 - and after that, it switches to an account in their own name that they can spend as they wish. It was good to see the AI suggest involving the child in all financial discussions to help them become a bit self-sufficient and mitigate some of those risks, but the answer did not spell out the important access at age 18 point. We know that investing gives the best chance of growing money over the long term - above cash and rises in the cost of living. But the short investment window between now and the time the eldest child would go to university was not mentioned at all as a risk. A specific fund recommendation from AI would be a bit of a red flag, but it's helpful to give people an idea of what could be considered or where to find more information. For example, what is an index fund, or a diversified portfolio and what are the likely costs. Here, a real adviser could make a formal recommendation, or an expert could point out how to research different types of funds. We asked: I have just bought my first home and am expecting a child with my partner. What types of insurance do we need and how much should we spend? We travel on holidays every year and both work full time. ChatGPT gave a list of insurances and explained what each does, including what policies typically provide and exclude. For example, it said "life insurance pays a tax-free lump sum or regular payout if a policyholder dies during the term... A Which? comparison found a 30-year-old could insure £300,000 (25-year term) for about £113 per year." It said the key policies to get in this case were life insurance, income protection, critical illness cover, buildings insurance, contents insurance, and travel insurance. It said: "To save on premiums, you can bundle cover as insurers often discount multi-policy customers. A joint life policy (pays on first death) is cheaper than two single life policies, but note it ends on first claim. Sometimes buying separate dual life (first-death) and second-death life insurance can be optimal. Rates vary widely so get multiple quotes." Read ChatGPT's full answer here Graeme Trudgill, chief executive of the British Insurance Brokers' Association says the response is "very generic" and does not take into account the complexities of insurance. Brokers, he says, are able to negotiate with providers on behalf of the consumer and know what the best policies are on the market. Kathryn Knowles from brokers Cura Insurance says some of the advice on critical illness cover was confused and did not properly distinguish it from income protection, which advisors have to do. And Garry Nelson from AllClear Travel Insurance says the AI's response on travel insurance is "very simplistic" and fails to help people in what they need, be it a single trip or annual policy. "This is as far as ChatGPT can go in my opinion for travel insurance enquiries - ie offering a general description as it is not regulated to offer anything more detailed or complex," he says. The responses from ChatGPT were largely limited to general summaries about the various topics - and sometimes even contained inaccuracies. They may be a useful introduction and guide, but lack the level of detail needed to make serious decisions that could cost thousands of pounds. It's a good place to start if you want an idea of some of the things you need to think about before making decisions - but if you want advice, you should be better off with a human. * The responses from ChatGPT have been edited for this article What to ask and how You will get better detail in an answer if you provide a lot of information, such as your age, your salary and what debts you have, rather than just asking a general question. Check your privacy settings to ensure you are comfortable with how ChatGPT processes your data. You may well want to ensure your chats are not being used for training. Don't rely on the AI to tell you about the most up-to-date products. Instead do your own research or go to an adviser. The AI is better placed to give plans or broad strategies. Use it as a jumping-off tool, not for a final plan. While you might get some good general details, don't make any decisions without doing your own research as well or consulting an expert. If you don't understand a term, ask the AI to break it down for you - for example, you might want to know what the difference is between types of loan available when you go to university.