Unlocking Financial Mastery: How ChatGPT Can Transform Your Money Management Skills

Artificial intelligence has become integrated into various aspects of our lives, including financial management. We posed several common personal finance questions to the free version of ChatGPT, a widely recognized AI chatbot, to seek its assistance. Following this, we shared the AI’s responses with financial experts to gauge their opinions.

Pensions

We inquired: “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 where I’ve saved £20,000. My employer contributes 4% of my salary. I aim to retire at 60 and would like to ensure I have adequate funds to avoid financial worries later in life. Should I increase my savings?”

ChatGPT responded: “For a comfortable retirement, one requires approximately £43,000 annually (in present value), whereas a moderate lifestyle might necessitate around £31,000 each year. To cover £43,000 per year over a 20 to 30-year retirement, you would need a substantial pension pot of about £793,000 in addition to your state pension. Conversely, maintaining a moderate lifestyle with £31,000 annually would demand roughly £478,000 in savings. Your state pension, starting at age 67, provides about £12,000 yearly, which falls short of the £43,000 needed for comfort, creating a ‘pre-state pension gap’ that could exceed £150,000. Thus, you must plan to cover all expenses for those initial seven years using your own savings. Even with optimistic growth, you would still fall short of the required £500,000 to £800,000 range. Therefore, you need to save more—significantly more than the current 9% rate. Vanguard recommends saving 12% to 15% of your income annually (including employer contributions), while Legal & General suggests a general rule of saving half your age, which for you would equal 17.5% of your salary. Given your employer’s 4% contribution, aiming for an additional 11% would be advisable. Don’t overlook UK tax relief: your 20% basic-rate relief effectively means that every £80 saved costs you only £60 net. It may also be wise to consider topping up with a lump sum or investing in a stocks and shares ISA.”

ChatGPT’s answers were largely summary-based and occasionally contained inaccuracies. Steve Webb, a partner at pension consultants LCP, commented: “Utilizing the Pensions and Lifetime Savings Association (PLSA) standard for ‘comfortable’ and ‘moderate’ income serves as a sensible starting point. For someone who is currently 35, the state pension age mandated by law will be 68, which makes the reference to 67 inaccurate. The PLSA states you need £43,000 annually post-tax, implying a pre-tax income of roughly £50,000. You receive £12,000 yearly once you reach state pension age; however, for the first eight years of retirement, you will need to rely solely on your pension pot. This indicates that you would need approximately £635,000 based on current calculations. Hence, the figure of £793,000 may be inflated, possibly stemming from an unspoken assumption that a quarter could be withdrawn as tax-free cash.” He continued, “It is favorable that the AI highlights the reliance on your private pension during the initial years of retirement, which many advisers typically assess through basic cash flow modeling. The suggested rules of thumb are a reasonable starting point, although the guideline about saving a percentage that is half one’s age is applicable for those beginning to save at that same age. A notable exclusion is the potential for employer matching contributions. Some companies may offer a higher contribution if you increase yours, thus making additional workplace savings far more appealing than the suggested ISA route. Additionally, if you consider purchasing an annuity at 60, it is essential to account for factors like inflation protection, which would consequently increase your target pot size. Overall, while the AI’s response is not entirely flawed, the error regarding state pension age necessitates a deeper exploration of the assumptions that were made.”

Mortgages

We asked: “We have 20 years remaining on our mortgage, and the current rate is set to expire in a few months. The loan-to-value ratio stands at about 50%. What are the best rates available in the market? Should we opt for a two-year or five-year fix, or should we remain in our current arrangement hoping for rates to decrease?”

ChatGPT stated: “The most competitive two-year fixed rates are around 3.7% to 3.8%, while five-year fixes range from 3.8% to 3.9% for borrowers with substantial deposits. With 50% equity, you should qualify for the most favorable rate tier. For instance, Lloyds Bank offers a two-year fix at 3.72%. Be mindful that these often come with arrangement fees (typically around £999), which should be included in your calculations. For five-year arrangements, Lloyds provides a 3.78% rate. If you take no action, your mortgage will revert to the lender’s standard variable rate (SVR), which usually sits significantly higher, between 7% and 8%. An SVR can fluctuate if rates rise, and lenders are not mandated to fully pass on any rate reductions. If you anticipate further rate reductions, a two-year fix allows for sooner refinancing at potentially lower rates. The downside, however, is the necessity of remortgaging more frequently: after two years, another deal will be required. Five-year arrangements, while likely slightly costlier, offer longer-term peace of mind and shield you if market rates surge or remain high. Stability in repayments often makes five-year fixes favorable. Most analysts forecast modest rate drops ahead; economists at Barclays expect the bank rate to dip to 3.5% by early 2026, possibly leading to further reductions in mortgage offers, though not to the pre-2020 ultra-low levels.” Most professionals advocate for securing a fixed rate now, particularly to avoid the significantly higher SVR, with a view to reconsidering options in a year or two.

David Hollingworth, a broker with L&C Mortgages, remarked: “This response does not even approach the level of advice that a proficient adviser would provide. However, it does offer a swift overview of current market trends and highlights critical elements that borrowers may wish to consider. The AI’s reply is somewhat disjointed, shifting from specific information, such as the Lloyds rate, to more generalized observations. Additionally, that deal is now outdated and required the borrower to be a current account customer. Borrowers must also recognize there are options available that may lower or eliminate arrangement fees, which could be more advantageous for those with smaller mortgages. It seems to hedge regarding future rate predictions—the reality is that no one can claim certainty, including AI. While it was asked about two- and five-year rates, the response fails to consider whether other options might be more suitable. A qualified adviser would guide a borrower through their options, revealing alternatives such as a three-year fix, a 10+ year option, and the pros and cons of variable rate deals. Though the AI’s response may stir thought for borrowers and encourage them to reflect on questions they want to discuss with a human adviser, most borrowers will likely have already researched online for ‘best buy’ deals before seeking tailored advice. Overall, ChatGPT can serve as an efficient starting point for gathering general information quickly as part of that research.

Funding University

We asked: “I have two children (12 and 15) who are both in secondary school. They both intend to attend university after finishing school. What is the best way for me to begin saving, and how much will I need to set aside? They will be going to university in the UK. Can they secure student loans? What will accommodation costs be?”

ChatGPT began by detailing government loans available for tuition and living expenses, including repayment timelines. It noted that eligible children might qualify for a minimum maintenance loan, which ranges from £3,907 to £6,853, depending on their work and study locations.

The advice then shifted to the importance of early savings through dedicated education plans. Junior ISAs enable tax-free savings or investments up to £9,000 annually for each child, with any growth remaining tax-free until the child reaches 18. Even modest regular contributions (e.g., £50-£100 monthly) into a Junior ISA or a high-interest children’s savings account can accumulate significantly over time. Additional options include premium bonds, stocks and shares ISAs (which carry higher risks but potentially greater returns), or a traditional savings account in the parents’ name. Considering long-term growth through investments, such as index funds or diverse portfolios, can offer better returns compared to standard savings accounts, albeit with the risk of loss.

Additionally, it encouraged parents to foster an early saving mindset in children and explore available bursaries and scholarships.

Experts have acknowledged that while the AI provided a fair overview of potential university costs and loan levels, it fell short in helping individuals make tailored decisions. Conversations with a financial advisor would typically delve deeper, seeking additional information to supply a more nuanced response. Prioritizing one’s own financial health—such as ensuring there’s an emergency fund to handle unexpected expenses—is critical before saving for a child’s education. The AI did not adequately address this aspect, starting with the assumption that the user’s finances are stable.

A Junior ISA is a sensible choice for dedicated savings towards university costs, but it should be noted that funds remain inaccessible until the child turns 18. Afterward, it converts into their personal account, which can be spent at their discretion. While it is beneficial to involve children in financial discussions to foster self-sufficiency, the AI response overlooked the significant detail that access to these funds changes at age 18.

Investing generally offers better long-term growth prospects compared to savings, particularly in light of inflation. However, the short investment horizon before the oldest child attends university was not addressed, representing a risk factor. Specific fund recommendations from AI can raise concerns, though providing general guidance on investment options like index funds or diversified portfolios is helpful. Expert advice could clarify these choices and outline research methods for different types of funds.

When inquiring about necessary insurance after purchasing a first home and expecting a child, ChatGPT offered a comprehensive list of essential coverages, including explanations of what each policy includes and excludes. For instance, it specified how “life insurance pays a tax-free lump sum or regular payout if a policyholder dies during the term,” noting that a 30-year-old might insure for £300,000 over 25 years at about £113 annually. The key policies highlighted were life insurance, income protection, critical illness cover, buildings and contents insurance, and travel insurance.

It also suggested bundling insurance policies to save on premiums since many insurers offer discounts for multi-policy customers. Using a joint life policy (which pays out upon the first death) was noted as more affordable than holding two individual policies, although it ends after the first claim. The AI advised that sometimes a combination of dual life (first-death) and second-death life insurance might be most beneficial, recommending obtaining multiple quotes due to significant pricing variations.

However, critiques indicated that the AI’s response on travel insurance was overly simplistic. Experts pointed out that the guidance missed the complexities involved in insurance and emphasized that brokers are better suited to negotiate and identify optimal policies. Clarification between critical illness cover and income protection was also noted, which may lead to confusion for consumers.

The general consensus among experts is that while ChatGPT offers a useful overview of various topics, its insights often lack depth and accuracy necessary for making significant financial decisions. Its responses can serve as a starting point for understanding relevant considerations but should not replace professional advice. Users are encouraged to provide detailed information when seeking assistance, such as age, salary, and existing debts. Always ensure privacy settings are appropriate for personal data handling and remain vigilant in pursuing the latest information and recommendations through personal research or consultations with licensed advisors.

Utilizing AI can be beneficial for brainstorming or formulating plans but should be complemented with thorough research before making substantial financial commitments. If any terminology is unclear, users can ask for further clarification, such as the distinctions between various university loan options. For more extensive assistance in the free version of ChatGPT, users can opt for the “Run Deep Research” feature, allowing for broader inquiries.