PVIFA Calculator

PVIFA stands for Present Value Interest Factor of Annuity. It helps an investor determine the value of his investment in the time to come. This factor is used to determine the profits that an investor would make if he were to invest that would guarantee him annuity over a fixed period of time. To understand what it means, one first needs to understand the meaning of annuity and how investments in annuities are made.

PVIFA Calculator is an online gadget that enables the investor to determine his prospective gains. It is freely available for use and ensures that an investor has all the figures in hand before he makes an investment.

What is an Annuity?

The typical definition of an annuity is a specific sum of money that is paid over a period of time in return for a lump sum investment made on the part of the investor. More often than not, this is used to generate regular income for a person after retirement. The investor has the flexibility to design certain aspects of the annuity to suit his requirements. PVIFA Calculator can prove to be of great help in deciding whether a particular annuity contract is worth investing in.

What is the Need for an Annuity Calculator?

People are drawn to investing in annuity contracts because it offers an option for stable growth. The value of the money invested will increase as time goes by. However, it requires accurate estimates to determine the growth. This is where the PVIFA Calculator comes into play. It helps an investor determine the estimated growth if he chooses to invest in a particular annuity contract.

The PVIFA Calculator simplifies the process of annuity calculations. Thus, the investor does not have to make the complex calculations himself and can instead depend on this digital tool.

Annuity calculators make it possible for the investor to choose the type of annuity fund they wish to invest in. Sometimes an investor may also wish to ascertain if he should invest in an annuity fund or a regular mutual fund. At these times, the calculator helps the investor view the estimated profits he might make in the future and make an informed decision.

How to Calculate Annuity with an Annuity Calculator?

The PVIFA Calculator works based on a particular formula. Unlike the other formulas used to calculate interests on the amount deposited, this is a lot more complicated. This gives rise to the need for the PVIFA Calculator. The formula used for annuity calculations is as follows:

PVIFA = (1 – (1 + r) ^-n)/r

Here:

r = periodic interest rate for every period

n = total number of periods

Now, let us look at an example to get a better idea of how the PVIFA Calculator works:

Taking an assumption that an investor wishes to invest in a company, on the condition that he will be provided with an annuity of Rs. 3, 00,000 amount, one each year, equally distributed over 8 payments, at an interest of 4%.

According to the provided data

n = 8

r = 0.04

All that remains to be done is input the values into the formula

PVIFA = (1 - (1 + 0.04) ^ -8)/ 0.04

Hence, PVIFA = 6.73

Now, since the PVIFA value has been ascertained, it can be assumed that every rupee invested by the investor will be 6.73 times its original value in the time to come. This can therefore be assumed to be the growth rate of the initial value invested.

To determine how much the investor will gain eventually, the initial investment will be multiplied by the PVIFA value.

Therefore, 3, 00,000 * 6.73 gives us 20, 19,000. This is the value that will be paid to the investor over the period of 8 years.

PVIFA Table

Using the PVIFA Table is another way of determining the PVIFA value. These tables were common in practice when PVIFA Calculators did not exist. They show the PVIFA values based on commonly used interest rates. They are, however, not as specific and convenient as using the calculator and may not be accessible to everyone.

Factors that affect PVIFA Calculations

When using the PVIFA Calculator, the investor will be expected to supply certain information. This is in order to ensure that the assumptions being made are realistic and the goals that the investor is aiming to meet are possible. It gives the company a better idea of the financial situation, health status, spending habits, etc., of the investor to make more accurate assumptions for the future. Underlying is the list of information that the investor is expected to provide:

  • Information regarding income: An investor must declare his income and its sources honestly to better understand what his future investments might be.
  • Information regarding the age of the investor: This gives an idea of the length of time that an investor has before retirement and for how long he can stay invested in the annuity contract.
  • Information regarding savings and spending habits: This will provide information regarding the amount of investment that is needed to meet the retirement goals of an investor.
  • Information regarding inflation rate: Keeping the inflation rate in mind is crucial as investment returns seem less attractive as inflation rises.
  • Information regarding rate of interest:Investors may choose between fixed returns and variable returns.

Information Required for PVIFA Calculator

  • The investor must keep in mind his financial constraints for the future before investing in an annuity contract.
  • The growth rate is subject to inflations in the future.
  • Investors may avail of discount rates with specific contracts. This information may be input into the PVIFA Calculatorto obtain the adjusted annuity payment values.

Benefits of Using an Annuity Calculator

  • It provides accurate calculations for annuities that might be received at present or in the future.
  • It provides accurate answers to all types of annuity funds that an investor chooses to invest in.
  • It makes complex calculations on behalf of the investor in a short time.

FAQs

Disclaimer: Policybazaar does not endorse, rate, or recommend any particular insurer or insurance product offered by an insurer.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply.

**Tax benefit is subject to changes in tax laws. Standard T&C apply.

Written By: PolicyBazaar - Updated: 08 June 2021
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