What is Annuity Due?
An annuity due is a series of equal payments made at the beginning of each period, not the end. Rent and insurance premiums are the classic examples, because you pay for each month before you use it.
Is an annuity due paid at the beginning or the end?
An annuity due is paid at the beginning of each period. An ordinary annuity is paid at the end.
- Annuity due. The first payment is made on day one, and the last payment is made at the start of the final period.
- Ordinary annuity. The first payment comes one full period after the start, and the last arrives at the end of the final period.
That one-period head start is the only difference. It is also why an annuity due is always worth a little more than an ordinary annuity with the same payments.
Annuity due vs. ordinary annuity
| Feature | Annuity due | Ordinary annuity |
|---|---|---|
| Payment timing | Start of each period | End of each period |
| Other name | Annuity in advance | Annuity immediate, or annuity in arrears |
| Common examples | Rent, leases, insurance premiums | Mortgages, car loans, bond interest |
| Present value | Higher | Lower |
| Future value | Higher | Lower |
The name “annuity immediate” trips people up. In finance math it means an ordinary annuity, paid at the end of each period, even though it sounds like the opposite.
Annuity due formulas
The present value and future value formulas both start with the ordinary annuity formula and multiply by (1 + r). That extra factor gives each payment one more period to earn interest.
Present value of an annuity due
PV = PMT × [1 − (1 + r)−n] ÷ r × (1 + r)
Future value of an annuity due
FV = PMT × [(1 + r)n − 1] ÷ r × (1 + r)
- PMT is the payment each period.
- r is the interest rate per period. For monthly payments, divide the annual rate by 12.
- n is the total number of payments.
The shortcut: annuity due value = ordinary annuity value × (1 + r). This works for both present and future value.
Annuity due example
Say you receive $1,000 a year for 10 years and money earns 6% a year. Here is what the timing is worth.
| $1,000 a year, 10 years, 6% | Ordinary annuity | Annuity due |
|---|---|---|
| Present value | $7,360 | $7,802 |
| Future value | $13,181 | $13,972 |
- Present value. $1,000 × 7.3601 = $7,360 for the ordinary annuity. Multiply by 1.06 and the annuity due is worth $7,802, or $442 more.
- Future value. $1,000 × 13.1808 = $13,181 for the ordinary annuity. Multiply by 1.06 and the annuity due grows to $13,972.
The gap is always exactly one period of interest. At 6% a year, the annuity due is worth 6% more; with monthly payments at the same rate, the gap shrinks to 0.5%.
Real-world examples of an annuity due
- Rent and leases. You pay on the first of the month for the month ahead.
- Insurance premiums. Life, auto and health premiums are paid before the coverage period starts.
- Some retirement savings plans. Depositing money at the start of each year, instead of the end, turns a savings plan into an annuity due.
Disadvantages of an annuity due
- The payer gives up cash sooner. Paying at the start of each period means less money on hand and one less period of interest for the payer.
- It costs more to buy. Because its present value is higher, an annuity due costs more than an ordinary annuity with the same payments.
- The difference is small. For monthly payments it is worth only one month of interest, so timing rarely changes a real decision.
Is a retirement annuity an annuity due?
Usually not. Most immediate annuities (SPIAs) make the first payment one month after you buy, which makes them ordinary annuities in finance terms.
A deferred annuity is a different idea entirely. “Deferred” describes when income starts, years later, while “annuity due” describes when each payment lands within its period.
To see what an income annuity would pay you each month, try our immediate annuity calculator, or compare the types of annuities side by side.
Frequently Asked Questions
What is an annuity due?
An annuity due is a series of equal payments made at the beginning of each period. Rent and insurance premiums are common examples.
Is an annuity due at the beginning or the end of the period?
The beginning. An ordinary annuity, also called an annuity immediate, pays at the end of each period.
What is the difference between an annuity due and an ordinary annuity?
Only the timing. An annuity due pays at the start of each period and an ordinary annuity pays at the end, so an annuity due is worth one extra period of interest.
What is the formula for the present value of an annuity due?
PV = PMT × [1 − (1 + r)^−n] ÷ r × (1 + r). It equals the ordinary annuity present value multiplied by (1 + r).
Why is an annuity due worth more than an ordinary annuity?
Each payment arrives one period earlier, so it has one more period to earn interest. That adds exactly one period of interest to the total value.
Is a SPIA an annuity due?
Usually not. Most single premium immediate annuities pay the first check one month after purchase, which is an ordinary annuity in finance terms.
