Annuity vs. Perpetuity: What’s the Difference?
The main difference between annuity and perpetuity is that the present value of a perpetuity is calculated using a formula that assumes a perpetual stream of equal payments whereas the present value of an annuity is calculated using a formula that takes into account the fixed term of the payments.
Before we move to more differences, let’s first understand Annuity and Perpetuity:
- Annuity: An annuity is a financial product that provides a series of fixed payments over a specific period of time. These payments can be made monthly, quarterly, annually, or at some other interval.
- Perpetuity: A perpetuity is a financial product that provides a series of fixed payments that continue indefinitely. In other words, there is no set end date for the payments.
Now, let’s get to Annuity vs Perpetuity:
Major differences between Annuity and Perpetuity
| Annuity | Perpetuity |
|---|---|
| The total number of payments in an annuity is finite. | The total number of payments in a perpetuity is infinite. |
| An annuity is typically used for a specific purpose, such as funding retirement or paying off a mortgage. | A perpetuity can be used for a wide range of purposes. |
| An annuity has a set end date. | A perpetuity continues indefinitely. |
| An annuity has a fixed term. | A perpetuity has no fixed term and provides payments indefinitely. |
| An annuity can be structured to provide level payments, increasing payments, or decreasing payments over the term of the contract. | A perpetuity typically provides level payments. |
So, these are the main differences between the entities.
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