What Is an Annuity?
An annuity is a financial product that pays out income in regular payments, typically over several years.
The payments can be monthly, quarterly, or yearly and last for a specific period (term) or the rest of your life (permanent).
Annuities are often used as a retirement planning tool because they can provide a steady income during retirement.
What Is an Ordinary Annuity?
An ordinary annuity is the most common type of annuity. With an ordinary annuity, payments occur at the end of each period (month, quarter, year).
For example, if you have an ordinary annuity that pays out monthly, you will receive your payment on the last day of each month.
An ordinary annuity is also known as a deferred annuity.
What Is an Annuity Due?
An annuity due is less common than an ordinary annuity, but it works in a similar way. The main difference is that with an annuity due, payments occur at the beginning of each period.
For example, if you have an annuity due that pays out monthly, you will receive your payment on the first day of each month.
So, if you have an annuity due that pays out monthly, you will receive your payment on the first day of each month.
An annuity due is also referred to as an immediate annuity.
Key Differences: Ordinary Annuity vs Annuity Due
Here are the key differences between ordinary and annuity due:
- With an ordinary annuity, payments occur at the end of each period. With an annuity due, payments occur at the beginning of each period
- An ordinary annuity has one less payment than an annuity due. For example, if you have a five-year ordinary annuity, you will make 60 payments (12 payments/year x 5 years). With an annuity due, you will make 65 payments (13 payments/year x 5 years)
- Ordinary annuities are less risky because you can use the money for longer before making payments. Annuity dues are riskier because you have to make payments immediately
- The present value of an ordinary annuity is less than the present value of an annuity due
Which Annuity Is Best?
The type of annuity that is best for you depends on your situation. If you want the least risk, an ordinary annuity may be the best choice. If you need immediate income, an annuity due may be the better option.
Ultimately, it is crucial to speak with a financial advisor to see which type of annuity makes the most sense for you.
The Bottom Line
An ordinary annuity is the most common type of annuity. With an ordinary annuity, payments occur at the end of each period. An annuity due is an annuity where payments occur at the beginning of each period.
An ordinary annuity and an annuity due differ in terms of the timing of payments, risk level, and present value.
The type of annuity that suits you depends on your situation. Speak with a financial advisor to see which type of annuity makes the most sense for you.
FAQs
1. Is it possible to have an ordinary annuity and an annuity due in the same contract?
Yes, some annuities have ordinary and annuity due options. This means that you can choose to receive payments at the beginning or end of each period.
2. Are annuities subject to income tax?
Yes, annuities are subject to income tax. However, there may be exceptions depending on the type of annuity and its usage.
3. How much money do you need to start an annuity?
The amount of money needed to start an annuity depends on the type of annuity and the provider. Some annuities may require a minimum investment, while others have no minimum. Speak with a financial advisor to learn more.
4. What if I need to cash out my annuity early?
Cashing out an annuity early may result in a surrender charge, a fee charged by the provider for canceling the contract. Speak with your provider to learn more about their specific policies.
5. Can I transfer an ordinary annuity into an annuity due and vice versa?
Yes, you can transfer an ordinary annuity into an annuity due. However, this may result in a surrender charge. Speak with your provider to learn more about their policies.
