A couple of things you might want to think about:
- For option 2, transferring all the money to an RRSP will use up RRSP contribution room equal to the cash amount (5,268.38). The locked in piece will not use up any RRSP room. (you should confirm with your plan administrator)
- Canadian commuted value rates are extremely low right now which means your commuted value is relatively high. So if you were ever thinking about taking the lump sum option, now is probably a good time.
- Is your pension indexed? Your commuted value looks very high compared to your pension, so I am guessing yes. You should find out how much (e.g., 50% CPI, 100% CPI) and if it is applied pre and post retirement, or post-retirement only?
- What kind of risk tolerance do you have? A pension provides longevity protection and is not correlated with the market, but the yield is likely lower than what you could get in the stock market.
- What is the interest rate on those student loans?
Personally, I would give heavy consideration to whether it is indexed or not. If it is indexed pre and post retirement, I would probably go for the pension. If it is not indexed, I might consider the lump sum.