Lloyds TSB bank stepped up its expansion drive yesterday when it unveiled plans to pay £7 billion sterling (€10.5 billion) for the mutually-owned pensions company, Scottish Widows.

The deal spells bonanza time for Scottish Widows policy-holders, who currently own the group and who will receive cash pay-outs of up to £6,000 each from Lloyds.

The bank hopes that the deal, which it forecasts will save an annual £60 million in the first three years of the merger, will be completed early next year.

Lloyds TSB said that the deal will create the second-biggest provider of life assurance, pensions and unit trust management in Britain. The enlarged group will be based in Edinburgh, using the Scottish Widows brand name.

The current Scottish Widows chief executive, Mr Mike Ross, will head the group. He said in a statement that the deal will provide "greater competitive advantage, greater growth prospects and the establishment of a much larger business, within the Lloyds TSB Group."

He added: "We could easily have continued being a great company on our own. We have chosen to be a greater company as part of Lloyds TSB." In 1995, Lloyds Bank was part of what was at the time the biggest merger in the British banking sector by taking over TSB bank. It also snapped up Cheltenham and Gloucester Building Society that year.

The latest deal will create an asset management operation with more than £80 billion under management.

The company said that 900,000 members who hold "with profits" policies are in line for pay-outs of up to £6,000, while 700,000 members who hold policies that do not have "with profits" status will receive £500 each.

Lloyds said that it will fund the deal from its existing resources and that there are no plans to issue more shares to finance the acquisition.

A spokeswoman said that some job losses in the group's combined Scottish workforce of more than 6,000 were likely, but that it was too early to say just how many posts would be cut.

Scottish Widows said that, in spite of the deal, there were no plans to sell its 5 per cent stake in Royal Bank of Scotland.

Market speculation had predicted that the stake, acquired in 1997, might be reduced after the deal. Financiers in the City of London gave a warm welcome to the deal, but the Lloyds TSB stock price fell sharply in early afternoon trading, down 23.5p at 901p.