An annuity can be a perpetuity, depending on how it is set up. An annuity is an investment that makes regular payments throughout the year. It can be set up as a fixed or variable payment. Fixed annuities pay out a set minimum, while variable annuities are linked to an investment portfolio.
A perpetuity is a type of annuity that is set up so that the payments will never end. There is no set maturity date. As long as an investor owns a perpetuity, they will keep receiving payments. When the investor dies, the perpetuity will pass on to their heirs and keep making payments as normal. If the investor sells the perpetuity, the new owner will receive the payments.
Key Takeaways
- Annuities are investments that make payments for a set duration of time. Perpetuities are investments that make payments indefinitely.
- A perpetuity is a type of annuity but extremely rare and not commonly offered by insurance companies.
- The value of a perpetuity tends to decrease over time.
- Perpetuities pass on to beneficiaries at the time of the holder's death and continue to make payments as before.
- Certain preferred stocks act as perpetuities in that they are sold without an expiration date and payout a fixed dividend.
Annuities and Perpetuities
Most annuities eventually stop making payments. They might stop making payments after a set number of years or after the contract owner dies. However, if an annuity is set up so that it never stops making payments, then it is a perpetuity. In other words, all perpetuities are annuities, but not all annuities are perpetuities.
Because of their extremely long, potentially infinite time frame, perpetuities are relatively rare investments. Annuities are sold by insurance companies, and most of them don't sell perpetuities. The closest example of a true perpetuity is a type of bond from the British government known as a "Consol." These bonds have no maturity date and keep making interest payments forever—or at least as long as the British government is in existence.
Although perpetuities pay out forever, they do not maintain their value as time goes on. The real benefit of a perpetuity is realized in the near future as opposed to later in time. This is due to the difference in how a perpetuity is calculated compared to an annuity.
Because a perpetuity goes on indefinitely it is difficult to calculate its face value. Its present value can be calculated, however. The current value of a perpetuity would be its payout every time period divided by the interest rate during that time period. Annuities are often purchased for retirement and therefore perpetuities are not necessarily a good fit for retirees. Perpetuities are more suitable for scholarships or charities that can be supplied with a consistent source of income.
Annuities should be a supplement rather than the main source of an individual's retirement funds, which should also include Social Security, other investments, and funds from retirement accounts.
Preferred Stock
Preferred stock in companies can also resemble perpetuities. Some preferred stock is sold without an expiration date. These stocks pay out a fixed dividend rate from the company's profits. This structure resembles a perpetuity; as long as the company is in business and making a profit, the preferred stock will pay out its set payments.
Advisor Insight
Tracy Ann Miller, CFP®, ChFC, CLU
Credent Wealth Management, Oklahoma City, OK
The definition of a perpetuity (as a noun) is "a bond or other security with no fixed maturity date."
In the sense that you have an income annuity such as a Single Premium Immediate Annuity (SPIA) or if you are taking income from a lifetime income rider, then the idea that it will last for the length of your life makes it similar to a perpetuity.
Most annuities sold today are NOT SPIAs but are fixed deferred annuities that are more like a CD or a bond that can have annual interest credits. They also have a penalty for an early surrender or withdrawals over a certain amount.
The Bottom Line
An annuity makes regular payments throughout a specific time frame but has an expiration date. Perpetuities make payments indefinitely. So not all annuities are perpetuities but all perpetuities are annuities.
Annuities are a common investment product but perpetuities are rare and often not beneficial as their value decreases over time.
