Answer

In the name of Allah

Both ways are correct, however it is better that when one is speaking to say Ya Rahman separately, I.e to make waqf on the end later. This is because the demand of spoken Arabic Language is this.

If one is reading Quranic or any other text then it is up to individual whether the word is read separately or together with what is after it. I.e. that you can read Ya Rahmaan or Ya Rahmaanu, where in the latter case you will not make Wafq on the end letter but join it with the word coming after it. Hence, it can be read in any way depending what rule of Arabic Grammar is applicable to the name of Allah which is present in the text, (genitive, Accusative, nominal etc).

In conclusion both ways of recitation and pronunciation which you have mentioned are correct and both will hold the same reward, Inshallah.

And Allah knows best

1. Tafseer Ruhul Maani, Vol. 1
2. Al-Faslu-Fee-Sanatil-I'raab

13 Oct 2005