Ordinary Annuity vs. Annuity Due

An ordinary annuity and an annuity due both involve a series of equal payments made at regular intervals, but the timing of those payments differs. With an ordinary annuity, payments occur at the end of each payment period, while an annuity due makes payments at the beginning. This timing difference can affect both the present and future value of the payments because money received earlier has more time to potentially earn interest or investment returns.

A financial advisor can help you evaluate annuities and other retirement-income strategies based on your financial needs, goals and time horizon.

Ordinary Annuity vs. Annuity Due at a Glance

The main difference between an ordinary annuity and an annuity due is when each payment occurs. An ordinary annuity makes payments at the end of each payment period, while an annuity due makes payments at the beginning. Because payments from an annuity due occur one period earlier, an annuity due generally has a higher present value and future value than an otherwise identical ordinary annuity, assuming a positive interest or discount rate.

Here’s how the two compare.

Feature	Ordinary Annuity	Annuity Due
Payment timing	End of each payment period	Beginning of each payment period
First payment	After the first payment period	Immediately at the beginning of the first period
Present value	Lower, all else being equal	Higher, all else being equal
Future value	Lower, all else being equal	Higher, all else being equal
Why values differ	Each payment occurs one period later	Each payment occurs one period earlier
Common examples	Many loan and retirement-income payment arrangements	Rent, lease payments and certain insurance premiums
Number of payments	Same number of payments for a comparable annuity	Same number of payments for a comparable annuity

What Is an Ordinary Annuity?

To understand an ordinary annuity, you should first understand what an annuity is not. Unlike buying stocks or bonds or funds, buying an annuity means buying an insurance policy, not buying securities. Specifically, an annuity is a contract to guarantee a series of structured payments over time. It starts at a predetermined date and lasts for a predetermined time.

It’s a payment against a larger obligation. For example, a cable bill is not, but a car payment or student loan payment is. Additionally, each payment in an annuity is the same, and each payment period is fixed to the same interval. For example, many retirement products are annuities that pay out fixed sums each month in retirement.

Therefore, an ordinary annuity makes its payment at the end of each payment period or interval period. For example, if an annuity has monthly intervals, it will make payments at the end of each month. Examples include mortgages paid at the end of the month, income annuities and dividend payments, which are usually made at the end of each quarter.

What Is an Annuity Due?

Now that you know the basics of an annuity and how an ordinary annuity works, you should know about an annuity due. An annuity due is paid at the beginning of each interval period.

One example of an annuity due is a rent payment because it is made at the beginning of the month rather than the end. Other examples include insurance premiums and car lease payments.

Example: $1,000 Annual Payments for Five Years

Suppose two annuities each make five annual payments of $1,000. An ordinary annuity makes its first payment at the end of the first year, while an annuity due makes its first payment immediately at the beginning of the first year.

Payment Timing	Beginning of Year 1	End of Year 1	End of Year 2	End of Year 3	End of Year 4	End of Year 5
Ordinary annuity	—	$1,000	$1,000	$1,000	$1,000	$1,000
Annuity due	$1,000	$1,000	$1,000	$1,000	$1,000	—

Both payment streams provide a total of $5,000, but the annuity due provides each payment one period earlier. For example, its first $1,000 payment is available immediately rather than at the end of Year 1. Its fifth and final payment arrives at the end of Year 4 rather than the end of Year 5.

That timing difference matters because of the time value of money. Money received earlier has more time to potentially earn interest or investment returns. As a result, when the payment amounts, number of payments and interest rate are otherwise identical, the annuity due generally has a higher present value and future value than the ordinary annuity.

Key Differences: Ordinary Annuity vs. Annuity Due

There are several key differences between an ordinary annuity and an annuity due. Some of the most notable differences are how they pay out and how they are valued. Here is a breakdown of the differences between ordinary annuities and annuities due:

Payouts: The most notable difference in ordinary annuities and annuities due is the way they pay out. All annuities make a payment once per period, just like how bills are due during each billing cycle. The payments come at the end of the period or the beginning. With ordinary annuities, the payments come at the end of each payment period. With annuities due, the payment comes at the beginning. In general, loan payments are made at the end of a cycle and are ordinary annuities. In contrast, insurance premiums are typically due at the beginning of a billing cycle and are annuities due.

Present Value: The present value of an annuity is the cash value of all your future annuity payments and is based on the time value of money. The time value of money is the concept that a dollar today is worth more than a dollar at the end of the year due to inflation. When comparing annuities, it is essential to remember that the length of a billing cycle can have a significant impact on the present value of the annuity. As a consumer, you can ask your lender or investment advisor to show you an annuity schedule.

What It Changes: Lenders and investment firms will calculate annuities. As a consumer, you have access to the annuity calculations as they are used to calculate how much you are charged. If you make your payment at the end of a billing cycle, your payment will likely be larger than if your payment is due immediately due to interest accrual.

Which Annuity Is Best?

In general, an ordinary annuity is most advantageous for consumers when they are making payments. Conversely, an annuity due is most advantageous for people when they are collecting payments. The payments made on an annuity due have a higher present value than an ordinary annuity due to inflation and the time value of money.

Besides the question of making or collecting payments, interest rates are a factor in evaluating annuities. When interest rates rise, the value of an ordinary annuity goes down; likewise, when interest rates fall, the value of an ordinary annuity goes up. In other words, $100 today is worth more than $100 one year from now.

What to Consider When Investing in Annuities

Start by evaluating why you want to invest in annuities. Are you seeking guaranteed income, tax deferral, or protection against outliving your savings? Your specific retirement timeline, risk tolerance, and income needs should guide your annuity selection. Consider consulting with a financial advisor who can help match annuity features to your financial situation.

Annuities typically include various fees that can significantly impact returns. Look for surrender charges, mortality and expense fees, administrative fees and investment management fees in variable products. Higher fees can erode your investment over time, so compare costs across different providers before making a decision.

Since annuities are only as secure as the company backing them, investigate the financial strength of any insurer you’re considering. Check ratings from independent agencies like A.M. Best, Moody’s and Standard & Poor’s. Higher-rated companies offer more security that they’ll fulfill long-term payment obligations.

Pay close attention to the annuity contract’s fine print. Look for details on guaranteed rates, how interest is calculated, withdrawal provisions and death benefits. Understanding how to invest in annuities requires careful examination of these terms, as they define exactly what you’re purchasing and what restrictions apply.

Bottom Line

The main difference between an ordinary annuity and an annuity due is when payments are made. Ordinary-annuity payments occur at the end of each payment period, while annuity-due payments occur at the beginning. When the payment amount, number of payments and interest rate are otherwise identical, an annuity due generally has a higher present and future value because each payment occurs one period earlier.

Retirement Tips

Navigating the complex rules around annuities and other sources of retirement income can be difficult. That’s where a financial advisor’s expertise and guidance is so valuable. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Be sure to review the pros and cons of annuities before making your decision.
Before deciding between annuities, get a clear picture on how much you’ll need in retirement and how you’re doing in moving toward that goal. A free retirement calculator will provide you with the information you need.