By Matt Scuffham

LONDON (Reuters) - Lloyds Banking Group Plc said its chairman Win Bischoff would retire in the next year having overseen the rebuilding of Britain's biggest retail bank following a 2008 government rescue.

The bank, which is 39 percent owned by British taxpayers, said Anthony Watson, its senior independent director, would lead the search for a new chairman.

Lloyds said Bischoff, 72, will retire no later than next year's annual shareholders' meeting in May 2014. The exact date will be subject to the appointment of his successor.

Bischoff said Lloyds had made significant progress towards its goal of becoming a strong UK-focused retail and commercial bank.

"Whilst clearly some challenges remain, the performance of the group is well on track. Indeed, in many areas, it is ahead of plan," he said in a statement.

Bischoff's successor will be tasked with preparing the bank for the government to start selling off its stake. Political and industry sources have told Reuters it would like to start doing so before the next general election in 2015.

Bischoff spent his career at Schroders before its investment banking arm was acquired by Citigroup in 2000. He became chairman of Citi until stepping down in 2009 and joined Lloyds shortly afterwards.

At Lloyds, he oversaw the appointment of Portuguese banker Antonio Horta-Osorio as chief executive in 2009, following the departure of Eric Daniels.

Shares in Lloyds closed on Friday at 59 pence and are creeping up towards the 61p level which the government regards as break-even on its 20 billion pounds investment.

Lloyds Banking Group holds its 2013 annual shareholders' meeting on Thursday in Edinburgh, Scotland.

(Editing by Sinead Cruise and David Holmes)