An annuity is a series of equal periodic payments made over a fixed period. Financial annuities include: ordinary annuity (payments at end of each period), annuity due (payments at beginning), perpetuity (payments forever), and retirement annuities (insurance products).

What is the difference between ordinary annuity and annuity due?

An ordinary annuity makes payments at the end of each period (e.g., most loans, bonds). An annuity due makes payments at the beginning of each period (e.g., rent, lease payments). Annuity due is worth slightly more because each payment earns one extra period of interest.

What is an annuity future value?

Future value of an annuity = PMT × ((1+r)^n − 1) / r, where PMT is the periodic payment, r is the rate per period, and n is the number of periods. It tells you the accumulated value of all payments plus interest at the end of the term.

What is an annuity present value?

Present value of an annuity = PMT × (1 − (1+r)^-n) / r. It discounts all future payments back to today. A $1,000/year annuity for 10 years at 5% discount rate has a present value of $7,722 — not $10,000 — because future payments are worth less in today's dollars.

How is annuity used in retirement?

Retirement annuities are insurance products that convert a lump sum into guaranteed monthly income. You pay a lump sum to an insurer, who pays you (and potentially your spouse) income for life. They eliminate longevity risk but surrender control of the principal.

Annuity Calculator

Calculate annuity future value, present value, or required periodic payment. Supports ordinary annuities (end-of-period payments) and annuities due (beginning-of-period payments) with annual or monthly compounding.

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Annuity Type

Payment per Period ($)

Annual Interest Rate (%)

Number of Periods (years)

Annuity Results

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Total Payments —

Total Interest —

Annuity Formulas

Future Value (Ordinary): FV = PMT × ((1+r)^n − 1) / r

Future Value (Due): FV = PMT × ((1+r)^n − 1) / r × (1+r)

Present Value (Ordinary): PV = PMT × (1 − (1+r)^-n) / r

Present Value (Due): PV = PMT × (1 − (1+r)^-n) / r × (1+r)

Where r = rate per period, n = number of periods, PMT = periodic payment.

Common Uses

Retirement income: Determining monthly income from a nest egg
Loan payments: Calculating mortgage or auto loan payment amounts
Savings goals: Finding required contributions to reach a future balance
Lottery payouts: Comparing lump sum vs. annual payment option

Ordinary Annuity vs. Annuity Due

An ordinary annuity makes payments at the end of each period — most loans and mortgages work this way. An annuity due makes payments at the beginning of each period — rent and lease payments are typical examples. Annuity due values are always higher than ordinary annuity values at the same rate because each payment earns (or avoids) one additional period of interest.

Frequently Asked Questions

What is an annuity in personal finance?

In personal finance, an annuity is a contract — usually with an insurance company — that provides regular income payments in exchange for a lump-sum deposit. Annuities are often used to create guaranteed retirement income. They come in fixed (guaranteed rate), variable (market-linked), and indexed (tied to a market index with a floor) varieties.

How does annuity taxation work?

For non-qualified annuities (purchased with after-tax money), only the earnings portion of each payment is taxable as ordinary income. The original principal is returned tax-free. For qualified annuities (held in an IRA or 401k), the entire distribution is taxable because contributions were made pre-tax. Annuities don't receive the preferential capital gains treatment that stocks do.

Should I take an annuity or lump sum from a pension?

This depends on your life expectancy, other income sources, and risk tolerance. The annuity protects against outliving your money — valuable if you live into your 90s. The lump sum offers flexibility and the ability to leave assets to heirs, but requires disciplined investing. A useful rule of thumb: divide the lump sum by the annual annuity payment to find the "break-even" years. If you expect to live beyond that age, the annuity may win.