Oh, sorry, I'm late. I think maybe initially when your iPhone saying"STORAGE FULL" is because you suspend upgrade and this may result in addition of temporary files, caches, and other files. Because there are just too many things that require physical storage. it's seems like your phone is...
You can pull out SIM card, it doesn't influence iPhone resetting. When you finish reset, you should insert SIM card, because you need it to activate iPhone.
The Encrypt Backup feature in iTunes locks and encodes your data. An encrypted iTunes backup includes certain information that other backups don't:
Your saved passwords
Wi-Fi settings
Website history
Health data
Hope this helps! :)