Hi Matts,
Your upgrade plan sounds good, it should work. If you have troubles we will try to help.
Encryption only affects encrypted passwords and perhaps smtp settings if you have it enabled to store it as site settings then those credentials are encrypted the same way as passwords. As long as machinekey in web.config stays the same there should be no problem with encryption but if machinekey is changed then decryption would fail.
Hope that helps,
Joe