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BOITUMELO NTSOKO: ChatGPT, the artificial intelligence chatbot developed by OpenAI, is all the rage right now. It has been asked to plan a holiday, give ideas on how to solve load shedding, and even asked to write articles on why the stock market will go up or down this year.
I thought we’d join in the fun and see how well the chatbot would perform when it comes to offering financial advice, compared to a financial advisor. In this episode, I’m joined by Eric Jordaan, who is a certified financial planner at Crue Invest. He’ll weigh in on the chatbot’s responses to questions submitted by Moneyweb readers, telling us where it hit the mark and the key points it may have missed. Welcome, Eric.
ERIC JORDAAN: Thank you, Tumi, and thanks for the invite. I’m looking forward to the discussion.
BOITUMELO NTSOKO: Before we start, I think it’s important to note that ChatGPT says that as an AI language model, it cannot provide financial or legal advice, but it can give you some general information about issues you ask it. In all its answers it advised that consultation with financial advisors, tax and legal experts should be considered to get appropriate advice.
Let’s jump right in. This is the first question we asked ChatGPT:
I currently have a living annuity and plan to emigrate. I was told by my financial advisor I can never take my money out of South Africa, but can only receive it on a monthly draw in the country I may go to. She has not suggested any options. Could you please advise what my options are?
This is how the app responded.
ChatGPT: The Financial Sector Conduct Authority regulates living annuities and requires that you receive your annuity income in South Africa, even if you are living abroad.
However, you may be able to transfer your living annuity to another South African financial institution that can pay your income to you overseas.
It’s important to note that any transfer of funds out of South Africa will be subject to foreign exchange control regulations and may also have tax implications.
Some other things you may want to consider include:
- Contacting your annuity provider to understand their policies and procedures regarding emigration and offshore transfers.
- Investigating whether the country you plan to emigrate to has any tax or regulatory implications for receiving income from a South African living annuity.
- Speaking to a tax specialist who can advise you on the tax implications of withdrawing funds from your annuity and transferring them offshore.
BOITUMELO NTSOKO: Eric, what do you think of this response?
ERIC JORDAAN: Thanks, Tumi. Yes, it certainly is interesting and it definitely is something that can give some broad guidance to an individual who sits with this specific question. The one good thing about it is that it does make it quite clear to the individual that they would need to get specific advice around the tax implications of the question.
As a start, it probably is a good place where you can get some generalised information about your question. If you look at some of the information that’s been given in more detail, it does highlight the fact that something like ChatGPT is quite limited in terms of the information because it’s completely based on the specific question that you’ve asked the AI.
As an example of that, looking at the answer he gave specifically regarding the fact that you can transfer your living annuity to another South African financial institution in order to pay the income overseas, just not necessarily a requirement, you could probably be able to get to the same result by leaving the living annuity exactly where it is.
Some other aspects of the answer that were given, where, as an example, it indicates that the Financial Sector Conduct Authority regulates living annuities. Although it’s not important to the real outcome of the answer, technically it probably is not exactly the correct answer to give. So there are definitely some limitations that the answer that’s provided does have.
I just wanted to add to that, as well, where it does talk about the income where it needs to be paid, yes, it does have to be paid into a South African bank account, but you can remit that income from there to wherever you are overseas and specifically where that payment of income does not necessarily affect your exchange-control limitations that you have per year.
So there is some detailed information that a financial advisor, for example, would be able to add to the answer that’s given.
Maybe one final aspect of the answer not apparent from it is that when someone does emigrate and is living abroad and is leaving his living annuity behind, there are some investment decisions that need to be made in terms of what asset exposure you would need to have in your living annuity, and that type of discussion is obviously not something that comes out from the answer that’s provided.
BOITUMELO NTSOKO: Could you maybe also just elaborate on some of the tax implications that would be applied to the strategy?
ERIC JORDAAN: Yes. So, for example where someone does receive a living annuity income within South Africa, although you might break your tax residency and are no longer a tax resident in South Africa, the fact that you are still receiving a living annuity income within South Africa will still make that income taxable within the country, because it will be seen as a deemed income received in South Africa.
So yes, it will have some tax implications still in South Africa, but also there you need to look at the jurisdiction that you are living in at that point in time, and how they would view a pension that the resident is receiving. There also might be double-tax agreements that come into play. So there’s definitely a lot more nuanced answer to the question that would need to be determined by asking the individual a lot more detailed questions about the exact position that’s set before them.
BOITUMELO NTSOKO: All right. This is the next question we asked the chatbot:
I am 37 and under debt review. Is it possible to request a partial withdrawal from my pension fund to settle my debts? I can’t get a loan or credit anywhere.
Here’s its response.
ChatGPT: It is possible to access your pension fund before retirement through a process called a withdrawal benefit. However, there are certain conditions that must be met to be eligible for a withdrawal benefit.
Firstly, you must have left your employer or be retired from the workforce. Secondly, you must have been a member of the pension fund for at least two years.
And thirdly, the amount you are requesting to withdraw must be less than the total value of your pension fund.
If you meet these conditions and your pension fund allows for partial withdrawals, you may be able to request a partial withdrawal to settle your debts.
However, it’s essential to consider the long-term effects of accessing your pension fund before retirement as this may impact your retirement savings. It’s strongly recommended that you speak to a financial advisor or debt counsellor before making any decisions regarding accessing your pension fund. They can assess your situation and provide guidance on the best course of action for your financial well-being.
BOITUMELO NTSOKO: Eric, could you please share your thoughts on this?
ERIC JORDAAN: Again, as the previous one, there are some good aspects to the answer, as it gives some broad guidance in terms of what the options are for the individual, and it does guide them towards speaking to a financial advisor before making decisions. So those probably are the good aspects of it.
But again, when asking a question like that where you are requesting the possibility of a withdrawal from a pension fund, there are a lot more nuances to the question before you can really give an answer.
As an example, when we refer to a pension fund there could be various different types of pension funds available in South Africa.
You need to understand what type of pension fund the individual is belonging to before you can give an answer. What I’m referring to here is you either have a defined-benefit or a defined-contribution fund, and both of them could have different aspects or rules or around what benefits you receive when you withdraw from a pension fund.
The second aspect to that as well is what ‘withdraw from a pension fund’ means.
Obviously, it would require the person to exit the fund, which means they would need to resign from their employer. So those are quite dramatic implications for the person asking the question, which they might not have in mind when they read the answer that is given by ChatGPT.
So those are the type of aspects that you would really need to delve into a bit more deeply with a client when you sit with a client as a financial advisor and talk to them about what their options are.
Obviously, other things like the tax implications of making a withdrawal like that are important aspects to discuss with a client before they can even consider something like making a withdrawal to settle debt.
BOITUMELO NTSOKO: Eric, you touched on defined and undefined pension benefits. Could you maybe just elaborate a bit on that?
ERIC JORDAAN: Either you have a defined-contribution or defined-benefit fund. Those are two different types of pension funds in South Africa.
A defined-benefit fund is where the rules of the pension fund determine what your benefit is that you would receive from the fund, either at retirement or at resignation prior to retirement. Typically your benefit is calculated by way of a formula, which takes into account what your salary was at that point in time [and] what your [period] of service was. And that would be then used to determine what your benefit is.
An example of a defined-benefit fund in South Africa would be for instance the Government Employees Pension Fund, where they have a specific formula that determines what the benefit is that a member would get from the fund.
The [defined]-contribution fund on the other hand is probably more common at the moment in South Africa, and that’s where you would make contributions on a monthly basis towards the pension fund, and you would then choose which underlying investment fund your contributions [should be] paid into. So your ultimate benefit that you would receive from the fund would be linked to the value of your underlying investments that you have within the fund.
BOITUMELO NTSOKO: And then our last question to the chatbot was this:
Can a loan agreement between natural persons be worded in that the outstanding balance is written off, without forming part of the granter’s estate? For example, a parent [lends] a child X amount of money; the loan agreement states this will be repaid at a fixed repayment value. During the repayment term, the parent then passes away. In a normal procedure that outstanding balance would form part of the parent’s estate. Can it however be written into the loan agreement that the outstanding amount be written off, or [be seen] to be repaid? Or can the parent only bequeath this in their will to their child?
This was ChatGPT’s advice.
ChatGPT: A loan agreement between natural persons can include a provision for the outstanding balance to be written off upon the credit grantor’s death. This is known as a forgiveness of debt clause.
However, it’s important to note that the inclusion of such a clause does not necessarily mean that the outstanding balance will not form part of the credit grantor’s estate.
The estate will still be responsible for settling any outstanding debts and obligations, and the executor of the estate will need to ensure that all creditors are paid before any assets can be distributed to beneficiaries. Additionally, the inclusion of a forgiveness of debt clause may have tax implications for both the credit grantor and the credit recipient, as forgiven debt may be regarded as taxable income for the recipient. It’s therefore recommended that individuals seek the advice of a qualified attorney or financial advisor before including such a clause in a loan agreement or will.
BOITUMELO NTSOKO: Do you agree with this, Eric?
ERIC JORDAAN: Yes. Again, broadly the information that’s provided is correct, but there’s actually a lot more detail to be asked in terms of what the intention of the individual is by wanting to include a clause like that within the loan agreement, because that intention could actually indicate quite a different outcome or different advice that you could give to the individual, as opposed to purely just what the technical implication would be of including such a clause within a loan agreement.
What my suspicion is around this is that the person asking the question might have the idea that including such a clause would, from an estate-cost perspective, have some benefits towards that. But also, there might be certain tax aspects that the individual doesn’t take into account by including such a clause.
In other words, there might still be estate duty implications on the loan, although the loan agreement is writing the loan off in the event of the death of the creditor.
So there are quite a few implications that you would need to understand, and how that actually impacts the person’s estate planning.
BOITUMELO NTSOKO: Eric, how would you advise this person to then go about this – both the parent and the child?
ERIC JORDAAN: From my perspective, I would much rather look at that in terms of dealing with the aspects within the will, because that’s how you could be fair across all the heirs, depending on if there is more than one heir, to ensure that everyone is treated in a fair manner. And that can only be done if that specific loan is actually then taken into account in the ultimate estate of the individual.
Also by including a clause like that within the loan agreement, there could be certain donations-tax implications, for example.
I’m not sure if the individual actually understands that they’re not really achieving any better outcome for themselves by including it in the loan agreement, as opposed to dealing with such a loan within the estate of the individual.
BOITUMELO NTSOKO: Do you think a robo-advisor would’ve fared better in its response compared to ChatGPT?
ERIC JORDAAN: Yes, a robo-advisor is also quite an interesting field that is developing all the time, and it definitely has its use. Probably the one aspect at the moment is that robo-advice is still very limited in terms of the scope of what it is intended to use for at the moment.
So if you look at the robo-advisor technology that’s available in South Africa at the moment, most of them are targeted towards guiding an individual towards making an investment decision in terms of determining what their risk appetite would be, what a suitable underlying investment choice would be, and what investment vehicles there are to use.
And that is really based on a decision tree that the client would go through. So it’s still very limited. But the benefit of doing that is it makes financial services available probably on a more cost-effective basis to individuals with a very limited or specific need. But asking broader questions from a robo-advisor like, for example, on withdrawal from a pension fund, that would not be an answer that you’d be able to get from the robo-advice technology that’s available in South Africa at the moment.
BOITUMELO NTSOKO: And what other aspects should people be aware of when considering using the services of a robo-advisor?
ERIC JORDAAN: Yes, robo-advice, as I said, there’s definitely a space for that because of the cost-effectiveness that it provides. But there are limitations in terms of the advice that a robo-advisor can provide. It is limited in terms of the questions or the intention that you go to that robo-advisor for. So it’s limited in terms of guiding you from an investment decision, and it doesn’t take the holistic financial planning of an individual into account.
As an example, I could go to a robo-advisor, wanting to start up a unit-trust investment, and have a regular monthly premium going in toward that investment. But there might be better ways of going about doing that investment, depending on what your actual investment objective is.
So if it is a longer-term retirement-focused investment, potentially you should be looking at using a different vehicle like a retirement annuity, where you could get the tax benefits for contributing towards that investment.
Similarly, if it’s an investment where you need access to the capital in the short term, again that would guide you away from using a retirement annuity, and more towards a unit-trust-based investment. Sometimes it doesn’t deal well with the specific question that you ask the robo-advisor, but there might be broader aspects that you’d need to take into account from a financial planning perspective to potentially give you a better outcome.
BOITUMELO NTSOKO: Thank you so much for joining us on this episode, Eric.
ERIC JORDAAN: Perfect. Thanks a lot, Tumi. It was really nice to talk about these new developments and I look forward to seeing how this develops into the future.
BOITUMELO NTSOKO: That was Eric Jordaan, a certified financial planner at Crue Invest.
