I'd take the package to a financial and tax advisor. Some pensions in option #1 offer a joint/survivor where it would pay your beneficiary a pension for their lifetime also. I'd look for that if you have a spouse to consider. And are you sure the monthly payment starts immediately or at some early or regular retirement date (i.e. you might be overstating the length of time in #1)?
#1 is irrespective of the market return vs #2 you are taking more financial risk
#1 is assuming you will live 45 years to 85....which may or may not happen
Generally in #1 the employer/plan will continue to pay the funds expenses and #2 the expenses will come out of your investment rate of return or other bank/mutual fund fees.
#2 assumes that you won't touch the IRA for other reasons over those 45 years (and in #1 you can't do that)....are you one that would use this money for things other than actual retirement (and IRAs don't have too many holds on them other than the 10% early withdrawal penalty and tax consequences)
There are pros and cons to either way. I wouldnt' take advice from strangers on the internet. Did the former employer offer any help line to call to discuss?
(I will say I chose #2 when offered, but my lifetime payment at retirement was small AND the amount given was small...I'd only worked there 7 years in the first 7 years of my career - at an HR consulting firm working in pension/401k administration--- so my average wages were pretty low..... yours is a larger amount hence the reason I say you seek advice from someone who is knowledgable and can read the 20 page document)

