You don’t need the Xposed framework. The Xposed framework is a prerequesite for a lot of useful modules like GravityBox (modify almost anything of your phone’s behaviour and look) or Xprivacy (permissions management). I use both and wouldn’t want to miss them, but they are not needed for FP Open OS to work.
So bottom line: You can skip the Xposed part altogether.
No you don’t have to do anything you haven’t done before the update.
The gist of the updateguide is: All modifications you did before the update (e.g. by flashing something via TWRP) you’ll have to redo after every update - and do so before rebooting. So: Boot to TWRP - flash the update - flash your other modifications - reboot to system.
I think I’ll add this to the guide, to make it more clear you don’t need to do everything in the guide.
I don’t think that flashing gapps or xposed had anything to do with encryption, as encryption only concerns /data partition, while gapps and xposed are installed on /system.
If you encounter problems while flashing with your recovery, you could try though to use a different recovery version for flashing. Though I’m not sure if this helps, but worth a try.
Getting rid of encryption is, to my knowledge, only possible through a factory reset and erasing/wiping /data partition.