What is a Perpetuity?

Sometimes known as a perpetual annuity, a perpetuity is a type of annuity that does not have a defined ending date. This creates a situation in which the recipient of the perpetuity can enjoy a steady stream of cash for an indefinite period of time. The term is also used to describe situations in which individuals are granted access to assets beginning on a specific date, but with no termination date set for that access.

One of the most common examples of a perpetuity is found in one type of bonds that was once commonly issued in the United Kingdom. Known as consols, these bonds provide annual interest payments from the date they are purchased, without actually identifying a maturity date. While there is the chance that the amount of the payments will incrementally decrease over time, the continuing flow of annual payments continues until the holder chooses to cash in the perpetual bond.

A perpetuity is also sometimes identified as continued access to an asset, such as a home or some type of property. An owner may arrange for a loved one to have this access for as long as he or she likes, even extending the access to the heirs of the loved one if desired. There may be some conditions associated with the arrangement, such as requiring the recipient to actually live in the home for a certain number of days each calendar year. As long as the terms of the perpetuity are observed, the access is maintained. Should the recipient choose to not comply with the terms, then the access is lost and the trust created to maintain the property is free to utilize the asset in any matter appropriate to the terms of the trust agreement.

Scholarships that are generated from the assets of an endowment fund may also fit the basic description of a perpetuity. This is because an endowment fund typically holds assets that make it possible to fund the scholarships and offer them to qualified students from one year to the next. There is usually no date set in which the endowment fund will no longer issue scholarships, and in fact some funds have offered this type of assistance to worthy students for decades with no plans to discontinue the practice.

With some types of perpetuity arrangements, the amount of benefit received from one period to the next may change, based on how the annuity is structured. For example, a perpetual bond issue may be structured with a floating or variable rate of interest. This means that the amount of the annual disbursement may increase or decrease, depending on what is happening with the interest rate. Typically, a perpetual annuity is arranged so that income generated by the underlying asset makes it possible to continue issuing payments to recipients. As long as sufficient income is received to cover expenses and generate profits, the annuity payments can continue.