Should you use your ISA allowance or wait for the new LISA?

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Pile of pound coins

At the beginning of next month, savers will have one more option available to them in the form of the new Lifetime ISA (Lisa). This product is designed to be an alternative to self-invested pension plans, offering all the benefits but with more flexibility. 

Available to under 40s only, the Lisa is a long-term savings product which can be used for either retirement or to help fund a deposit for first-time buyers. Savers can put away £4,000 a year boosted by a 25% government bonus. They are eligible to use the Lisa to buy a property after it has been open for a year. 

Like other tax-free savings wrappers, there is a penalty if the money saved in a Lisa is withdrawn before retirement or not used to buy a first home. The exit fee charged is 25%, equivalent to the government bonus plus 6.25%.

The Lisa offers more flexibility than a traditional Isa but is it the better option? Well, the answer to this question really depends on your financial circumstances. 

Suitable for some 

As the age limit for a Lisa is 40, anyone outside of this bracket doesn't have much choice in the matter, they're restricted to the standard Isa but for those under 40 trying to decide if a Lisa is for you, really depends on your financial position.

Indeed, with the Isa limit rising to £20,000 for the 2017/18 tax year, higher earners might do better to stick to this product for saving, especially considering the new dividend tax rules brought in by former chancellor George Osborne. A £1,000 Lisa bonus might seem attractive, but by combining a traditional Isa with a Sipp, you could shelter up to £60,000 per annum from the taxman. Over time, the tax-free returns from these substantial contributions will significantly exceed the Lisa bonus. 

Another thing to consider is that at the date of writing, many financial institutions are yet to introduce a Lisa product. Even though the product was conceived last year, the fine print is not yet complete, and many providers are refusing to offer a Lisa without further clarification from the government. 

Hargreaves Lansdown looks set to be the only traditional provider that will have a Lifetime Isa ready by the April launch date. Low cost robo advisor Nutmeg is also planning to launch its version of the product next month, but apart from these two providers, many other institutions are waiting for that clarification or just refusing to offer a product at all.  

Foolish summary  

Overall, for many investors choosing between an Isa and Lisa will come down to two variables, income and availability. High earners might be better off using other products to shelter savings from the taxman, while other savers may not be able to access a Lisa due to their age or lack of availability. 

However, if you are in the 18 to 40 age bracket and are on a modest salary but struggling to save for a first home, this might be the product for you. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.