Difference Between Annuity and Perpetuity

Difference Between Annuity and Perpetuity

In this fast-paced world, it is next to impossible to predict what happens in the next few seconds of our life. But, what we can do is be ready for whatever life throws at us. One way of doing it is to get an annuity or perpetuity bond for yourself. But most of us hit a wall while trying to deduce what is the difference between annuity and perpetuity.

When you want to get capital for support purpose only for a certain time in your lifetime, you can go for annuity contracts. But in case you want an infinite series of funds, then go for perpetuity. One can say that this is the main difference between perpetuity and annuity in simple terms.

Apart from this main difference between annuity and perpetuity, one can safely deduct that in both cases, disbursement is done constantly that could help you lead your life when you age.

We all burn with the same question while deciding – what is the difference between an annuity and perpetuity? When you are not facing the risk of dying too early, you face the risk of living too long! In that case, you might want to make sure that you are not dependent on your children for a source of income at the ripe old age. To make that happen, secure your old age with annuity or perpetuity contracts.

Let’s take a deeper look at how annuity differs from perpetuity.

Definition of Annuity

You must have heard how we get pensions when we age or mortgage when we need. These are typical examples of annuity plan.

Definition of annuity is simple. It is the funds we get at the schedule we have decided upon. You can choose to get your earnings every month, year, or quarter. You can even choose to get it on a semi-annual basis. But one thing that you may take advantage of is that you will receive only a fixed capital for the time you have requested for.

This type of contract has two variations. Ordinary annuity in which the premium is given to you at the end of each circle. While annuity due quite the opposite, that is, you get the money at the beginning.

When you calculate the interest, we must use compound interest rates. This is because these contracts are paid for a finite time period. Because of the nature, annuity is commonly used in financial markets.

Definition of Perpetuity

Perpetuity is said to be a kind of contract which is similar to annuity. But you can never compare an annuity contract with that of a perpetuity.

With that said, the definition of perpetuity contracts is quite simple too. These are nothing but payments that are made perpetually. In simple terms, if you want the periodic remittance to continue forever, then you can go for this. Corporate stock, the lease rentals you pay on a regular basis, and dividends are few of the examples.

There are two variations in perpetuity. Growing perpetuity where your money grow with time and constant perpetuity where the remittance remains the same with time. Because of the nature of this contract, one can never predict the future value. However, you can always deduce what is the present value with the help of simple interest.

Annuity vs Perpetuity Comparison Table

Basis of ComparisonAnnuityPerpetuity
DurationReceive payments over a set period of time Receive money an infinite number of times
Future valueCan be determinedCannot be determined
InterestCalculations using compound interestSimple interest
UsesUsed in financial marketsCannot be used in financial markets

Conclusion of the Main Difference Between Annuity vs Perpetuity

It is so important to understand what these topics are because this will make your financial life easier than you think. When you actually look at annuity vs perpetuity, differentiating them is quite easy when you understand the main difference.

Perpetuity is just another word for cash flow that lasts forever. While it’s brother is a contract that pays you a particular amount of your fortune till the time period that you have decided to get the amount for.

Perpetuity is way simpler to calculate while compound interest must be applied to its counterpart. Because of the infinite number of payments, one can never deduce where the future of their contract stands.