What is the difference between an ordinary annuity and an annuity due?

The timing of the payments is what makes an ordinary annuity differ from an annuity due. Ordinary annuity payments are made at the end of a period, which can be monthly, quarterly, or annually. Annuity due payments, on the other hand, are made at the beginning of the period. You pay your credit card bill at the end of the billing cycle, so it's an ordinary annuity. However, you pay rent, subscription fees, and insurance premiums in advance, making them annuities due. Annuities sold by insurance companies to provide retirement income can be structured as ordinary annuities or annuities due.

What are the four types of annuities?

The four main types of annuities are immediate, deferred, fixed, and variable. Immediate versus deferred annuities differ in when the payments begin. Fixed and variable annuities differ in risk and return.An immediate annuity begins producing income right away. You'd purchase an immediate annuity with a lump sum of cash.A deferred annuity starts generating payments at some future date, with taxes also deferred until that time. You can buy a deferred annuity with a single cash payment or a series of payments over time.Fixed annuities provide income based on a fixed interest rate. They are lower risk because the interest rate and payment amount don't change.Variable annuities produce income based on the performance of sub-accounts, which are usually stock or bond investment funds chosen by the annuitant. These have more return potential and more risk than fixed annuities.

What is considered an ordinary annuity?

An ordinary annuity can be any financial obligation that requires periodic payments made at the end of a period. Mortgages and car loans are ordinary annuities because you pay those in arrears, usually starting 30 or more days after the loan funds.

Ordinary Annuity vs. Annuity Due: What's the Difference?

The Difference Between Ordinary Annuity and Annuity Due

By Catherine Brock – Updated Jan 13, 2025 at 5:12 PM EST

Key Points

Ordinary annuities pay at the end of a period.
Annuities due pay in advance or at the beginning of a period.
Because of the difference in payment timing, the present value of an annuity due will be higher than that of an ordinary annuity with otherwise equal terms.

How does an ordinary annuity differ from an annuity due? Both are contractually obligated payment series, but they differ in the timing of the payment. An ordinary annuity pays at the end of a period, while an annuity due pays in advance.

Loading paragraph...

Person writing a check. — Image source: Getty Images.

Loading image...

Loading paragraph...

Why? Because you can invest and grow cash on hand -- which you cannot do with cash promised. Present value formulas account for this by using an interest rate to discount those future payments.

The present value of the ordinary annuity formula considers the dollar amount of each payment, the discount rate, and the number of payments. The present value of the annuity due formula uses the same inputs but adjusts for the earlier payment timing.

Mathematically, that adjustment involves multiplying the result by the discount rate plus 1. You can see this by comparing the two present value formulas below. Note that "pmt" equals the payment amount, "r" equals the discount rate, and "n" is the total number of payments.

Present value of ordinary annuity =
pmt [(1–[1/(1+r)^n])/r]
Present value of annuity due =
pmt [(1–[1/(1+r)^n])/r] x (1+r)

The takeaway is that an annuity due will have a higher present value than an ordinary annuity if all other factors are the same.

Ordinary annuity versus annuity due: FAQ

Loading faq...

About the Author

Catherine grew up in Southern California wearing a lot of black and trying to perfect the art of sarcasm. Prior to joining The Fool as a contract writer, Catherine was climbing the corporate ladder in marketing roles and dabbling in too many side hustles. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

XMFCatherineJB

@catherinejbrock

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.