An ordinary annuity is a stream of level payments that lands right after each period closes, for example on the last day of the month or year. It sets the default timing used in most annuity and bond formulas, and it is the opposite of an annuity due, which pays when a period begins rather than when it ends.
What is an ordinary annuity?
Picture a level payment landing once a stretch of time has already run its course, not before. That is an ordinary annuity: a mortgage bill due on the last day of the month, a bond coupon settled every six months, or a monthly annuity check that shows up after the period it covers has already ended. Unless a contract spells out something different, this closing-of-the-period timing is the default behind most fixed income arrangements, annuities included.
Ordinary annuity vs. annuity due
Timing is the only real difference between the two structures. An ordinary annuity pays you at the end of each period. An annuity due pays you at the start of each period instead. That single shift changes more than it seems. Because every payment under an annuity due arrives one period earlier, that money sits in an account earning interest sooner, before the next payment is even due. The result is that both the present value and the future value of an annuity due come out a little higher than an ordinary annuity with the same payment amount, rate and number of periods.
Why the timing matters
This distinction rarely changes which product you choose on its own, but it changes the math you rely on to compare options. When you or a licensed strategist run numbers to weigh two income streams, price a pension buyout, or check what a lump sum is worth against a stream of payments, you need to know which timing assumption sits underneath each figure. Confuse the two, even by a single payment period, and a present value estimate can come out wrong. That error is small on any one payment, but it compounds across a payout that can run 20 or 30 years.
Most annuity contracts default to ordinary annuity timing. If you come across a payment schedule that starts immediately, before a single period has passed, take a second look. That is usually the sign you are looking at an annuity due instead, and the time value of money behind each option is not quite the same.
Frequently asked questions
What is an ordinary annuity?
It is a stream of level payments that arrives once each period has closed, such as on the last day of a month or year, rather than at the start of that period.
How does an ordinary annuity differ from an annuity due?
Only the timing changes. One pays after a period closes and the other pays as it opens. Because a due payment lands sooner, it has extra time to earn interest, which nudges both its present value and its future value a little higher.
Why does this payment timing matter so much?
It decides which formula and which present value figure you should be using. Confuse the two timing rules while comparing income options, even by a single period, and the comparison skews, growing worse the longer the payout stream lasts.
Written and reviewed by
James Forren Warren
Licensed Retirement Income Strategist · License #20551202
James Forren Warren is a licensed Retirement Income Strategist with Tax Free Wealth Plan. For the past five years he has helped individuals and families turn their savings into retirement income they can count on. He writes and reviews the annuity research on this site and keeps it plain: what a product does, what it costs you, and who it actually fits.
Educational only, not investment, tax or legal advice. Tax Free Wealth Plan LLC is a licensed insurance agency, not a registered investment adviser or broker-dealer. Annuities are not bank deposits, are not FDIC insured and are not guaranteed by any government agency. Guarantees are backed solely by the claims-paying ability of the issuing insurance company. Features, rates and availability vary by state and change over time; the contract and disclosure documents govern.