What Happens If You Never Turn On Your Annuity Income?

Doing Nothing Is Still a Decision

There's a common and entirely reasonable position among New Jersey annuity owners: I don't need the income. The money is safe. I'll leave it alone. Sometimes that's exactly right. The contract may be doing precisely what it was bought to do — sitting quietly as the conservative corner of a retirement plan.

But "leave it alone" is often treated as the option with no consequences, and that's where owners get caught. A deferred annuity that's never activated keeps doing several things, year after year, whether or not anyone is paying attention. Some of them are fine. Some of them create a bill that lands on your children.

1. The Deferred Gain Keeps Growing — and It Never Gets a Step-Up

This is the consequence that matters most, and it's the one most owners have never been told.

While the contract sits, gains accumulate tax-deferred. That's the feature. The problem is what happens at death: unlike a house, a brokerage account, or shares of stock, an annuity receives no step-up in basis. The entire deferred gain carries over to your beneficiaries as income in respect of a decedent, taxed to them as ordinary income — at their rates, stacked on top of whatever they already earn.

So the longer a contract is left untouched, the larger the untaxed gain becomes, and the larger the eventual ordinary-income bill for your heirs. A contract "left alone" for fifteen more years isn't neutral; it's compounding a tax liability that transfers to the next generation at the worst possible rate. Our page on inheriting an annuity in New Jersey walks through what that looks like from the beneficiary's chair, including the payout deadlines they'll face.

2. Rider Charges Continue Whether or Not You Use the Benefit

Many annuities carry optional riders — guaranteed lifetime withdrawal benefits, income riders, enhanced death benefits — and those riders carry annual charges deducted from the contract. This is a factual matter of contract mechanics, not an opinion: rider fees are typically charged every year the rider is in force, regardless of whether the benefit is ever exercised.

For an owner who activates income and lives a long time, that's the bargain working as designed. For an owner who never activates, it's an annual cost paid across years or decades for a guarantee that's never used. Neither outcome is knowable in advance, which is exactly why the question deserves to be asked deliberately rather than answered by inertia. Your contract's annual statement or prospectus will show which riders are attached and what they cost — and many owners are genuinely surprised when they look.

3. If the Annuity Is Inside an IRA, RMDs Take the Decision Away From You

The "never turn it on" plan works only for non-qualified contracts — those bought with after-tax money. If your annuity is held inside an IRA or another qualified retirement account, required minimum distributions apply beginning in your early seventies under current federal rules, regardless of whether you want the money.

That creates a specific and common problem: RMDs must be satisfied on schedule, and how a deferred annuity's value is calculated for RMD purposes can be complicated where riders or guaranteed benefits are attached. Owners who plan to leave a qualified annuity untouched sometimes discover the requirement late, after a missed distribution has created a penalty. If your contract sits inside an IRA, the "leave it alone" option isn't actually available in the way you may think it is.

4. Every Contract Has a Maturity Date — and It's Coming

Annuity contracts are not perpetual. Each one specifies a maturity date (sometimes called the annuity date or maximum annuitization age), commonly falling between ages 85 and 95, at which the contract must annuitize or pay out. As that date approaches, the carrier sends election paperwork — and if the owner doesn't choose, the contract's default provision applies.

This is where "never turning it on" collides with reality: the decision gets made eventually, either by you on your terms or by a default clause drafted by the insurance company. Defaults vary by contract, and some are considerably worse than what an owner would have chosen deliberately. We cover this in detail on our page about annuity maturity dates and what happens if you do nothing.

5. The Contract Remains a Countable Asset for Long-Term Care

A deferred annuity you've never activated is, for New Jersey Medicaid purposes, generally a countable asset at its accessible value. That matters enormously if long-term care enters the picture: the same contract that felt like safe, untouched money becomes a barrier to eligibility that must be spent down, converted, or restructured — and surrendering it to spend down triggers ordinary income tax on all those deferred gains in a single year, at the worst possible moment.

Owners who address this while healthy have options. Owners who discover it at a nursing home admission have fewer. See annuities and NJ Medicaid for the full treatment, including how the same asset can sometimes be restructured into a planning tool rather than an obstacle.

6. The Beneficiary Designation Keeps Controlling Everything

An untouched contract is still governed by whatever beneficiary designation was signed at purchase — potentially decades ago, before marriages, deaths, divorces, births, and estate plan updates. Because annuities pass by designation rather than through your will, a stale form silently overrides careful planning. A designation naming a deceased primary with no contingent, an ex-spouse, or "my estate" (which forces probate and generally compresses the payout schedule) is one of the most common and most expensive oversights we see. If you do nothing else after reading this page, pull the contract and check who's named.

What This Actually Means

None of the above says an untouched annuity is a mistake. For plenty of New Jersey families, a deferred contract left in place is a perfectly sound part of the plan, and the tax deferral is doing real work.

What it does say is that "leave it alone" has consequences that compound quietly: a growing ordinary-income liability for your heirs with no step-up to soften it, ongoing charges for guarantees that may never be used, a forced decision waiting at the maturity date, exposure if long-term care arrives, and a beneficiary designation that may no longer reflect your wishes. Those are legal and tax facts about your contract, and they're knowable. The right response isn't to act — it's to look, and then decide on purpose.

If you're weighing the opposite question — what happens when you do activate income — that's covered in depth on our page about the tax and estate consequences of turning on annuity income.