Analysis carried out by the Centre for Economics and Business Research (Cebr) on behalf of the mutual society reveals how inflation has damaged cash savings returns over the past decade.

It means that parents who save for their children’s future in a cash junior ISA are unintentionally making them up to tens of thousands of pounds poorer.

Calculations by Cebr reveal that a parent maxing out the annual Junior ISA limit each year since 2011/12 would have saved £72,000 by December 2022, made up of £63,000 in contributions and £9,000 in interest.

However, in modern day prices, these deposits would actually be equivalent to £76,000. As such, after accounting for inflation and a generation of ultra-low interest rates, the real return on their savings would have fallen by 5.3% to £72,000.

By comparison, if the same parent had saved for their child using a stocks and shares JISA and invested in the FTSE All-Share Index, they would be sitting on a lump sum worth £86,000 today – growth of 36.4%.

As with cash JISAs, the return is weaker when accounting for the effects of inflation but still remains positive at 13.4%. Furthermore, the FTSE All-Share Index has been a relatively weak performer over this period compared with other share indices.

For example, exhausting the full JISA allowance in a fund tracking the S&P500 would give a value of £113,000 as of the end of 2022 – £41,000 more than a cash JISA. In real terms, the return on investment would still equate to just under 50%.

The reason for the gulf is because the returns generated by the stock market over the past 10 years have dwarfed inflation, whereas cash savings returns have failed to keep pace with rising prices.

Latest official figures show 57% of the total £1.1 billion held in junior ISAs is in cash, which is the lowest share on record. In 2013-14 this share stood at 75%, pointing to a dramatic change in preference towards stocks and shares JISAs as a saving option.

Alexander Manas, commercial director at Scottish Friendly, said: “There are nearly 1 million children in the UK who are set to benefit from receiving a junior ISA when they turn 18.

“For parents, it’s a great way to save or invest tax-free for a child’s future. If you’re thinking of setting up an account, one of the first decisions to make is whether to open a junior cash ISA or a junior stocks and shares ISA.

“There is no wrong decision as everyone’s situation and preferences are different, however you should take into consideration the age of the child. That’s because over the longer-term stocks and shares can often outperform cash, as our research shows, even though there is never any guarantee.

“Therefore if your child is younger you may be more inclined to consider investing to harness the growth potential of the stock market. But if you can’t decide, then there is no reason why you can’t have one of each.”