Parents and grandparents contribute around £500m each year to their child or grandchild’s cash ISA.

But young people could have earned an extra £1.2bn if the money had been invested instead, research shows.

Analysis by wealth manager Quilter found the value of these accounts stands at £3.5bn, assuming cash junior ISA returns of 2 per cent since 2011, whereas they could be worth as much as £4.7bn if they’d been invested in a global index.

According to HMRC data, just under a third of junior ISAs are allocated to stocks and shares, compared with four-fifths of Child Trust Funds (CTFs), the predecessor to junior ISAs.

Quilter is calling on the government to conduct a ten-year review of junior ISAs to consider why so few are invested compared with CTFs.

Heather Owen, financial planning expert at Quilter, said: “While holding cash is no bad thing, favouring cash over investments is unlikely to build long-term financial prosperity as savers will miss out on the miracle that is compound growth, and inflation may simply erode the real value of their savings.

“Holding too much in cash is particularly unsuitable for children holding junior ISAs as the money will be locked away for up to 18 years, meaning any stock market volatility can be smoothed and the scope for compound growth is much greater.”

A report by Quilter found parents favoured stocks and shares CTF accounts over cash accounts because they received numerous nudges towards investments in the CTF literature, and all CTF providers were required to offer both a stocks and shares and cash account.

In addition, if parents did not make an active selection between cash and investments, their child’s account was automatically allocated to investments.