Using the latest firmware is highly recommended. Along with bug fixes, most software is compiled for the latest firmware and using older firmware may put you in dependency hell.

To make a full system backup try using BackupMenu. This makes a complete image of your filesystem, so all your mods will remain intact.

i am on Pr1.2 too but i removed the mp-fremantlethats the only thing that causes the problem for me so now only those system parts gets upgraded which are needed by app that am installing.
Just wanted to know Any side effects?

You can't use the image from Backup Menu to move PR1.2 mods to PR1.3. If you try, you'll just end up undoing your upgrade, and just end up with a PR1.2 rootfs again, or some weird hybrid.

Most won't. A lot of the settings stuff gets saved to the themes folders, and the like. If you use Swappolube or have manually added your own files to the /etc/event.d scripts directory, those changes SHOULD - I THINK - stick. Transitions.ini might get overridden, but you can back that up. Hardware keyboard remap will probably be lost.. .You can just cp your latest transitions.ini and rx-51 (<--- the one in the xkb symbols directory) and copy them back, for those things. If you're using Theme Customizer, or a theme with custom transitions, then those things are in theme folders, which SHOULD be unaffected.

Basically, as far as I know, most of your mods should remain unless you've heavily messed with the very low-level stuff... You WILL have to reinstall power kernel and/or uboot. Not sure about bootmenu, backupmenu, or whatever, but those will probably need reinstalling - however, they're all auto-installable nowadays anyway.

This is all assuming your N900 doesn't say "you don't have enough space in your RootFS", in which case you can either do some fancy fiddling, or update by reflashing, in which case you will lose most of your installed stuff, etc. But I'm guessing if you have to reflash you won't bother.

As for hiding the thing about updates (and not having it update automatically in the background, say after it gets turned off, or something), that just opens you up to joyful things like possible security bugs/exploits not getting patched. Which is okay, assuming you at least don't neglect updates on your firewalls/intrusion-detections-systems, etc.

*Shrug* At th end of the day, you update your software however you want, of course.

- Edit -

Some quick answers to other questions:

Your SMS "base" should be fine. If it breaks, it has little if anything to do with the update.

Memory space should be more or less the same, since mostly it overrides packages, not just crams more stuff in.

Battery life, as with most updates Nokia has provided, actually got better in the average use-cases. Of course, those reports could just be placebo effects or people reflashing into their updates instead of SSU-ing.

Don't forget, the battery was reported to last longer with PR1.3.

I experienced it also; from 1.5 days to 2 days with medium usage.

with PR 1.3 the RSS Reader Widget doesn't function anymore. So i downgraded from 1.3 back to 1.2. and im happy with it. there are only 2-3 applications which cannot be installed anymore because of missing packages.

@raaj13
can you describe how this goes exactly?!:

"removed the mp-fremantlethats the only thing that causes the problem for me so now only those system parts gets upgraded which are needed by app that am installing"

im also using PR1.2

Maemo is based on Debian.

Debian did its dist-upgrade to squeeze.

Maemo has to follow!