As I am a bit paranoid about backing things up in the cloud can I just back my phone up locally on my pc and if so can these backups be encrypted?
It also doesn't look as though I can load my contacts without uploading to hotmail or gmail either, this seems overly complicated as again I don't want all my contacts being uploaded as I have concerns over this.
I remember a point in time where you had to ask yourself what's more important... being paranoid about losing your data or being paranoid about someone accessing your data. Today, there's no such compromise... if you pay attention to your options.
As an IT guy of 20 years, I can tell you that storing them on a Microsoft Account (ie. Hotmail/Outlook) is certainly your safest option if you take advantage of a strong password and the double-factor authentication (tying to your mobile phone number for verifications). In the old days, it was quite easy for people to fake a reset and steal an account. Now it requires a several step verification.
I store every last byte of data on my Microsoft account, and it would take a lot of effort to get to any of it without my knowing it. Here's how I do it...
I have a Microsoft account. Noone knows the master email address to it but me, and likewise on the highly complex password. Even if you discovered the address, you'd have to reset the password, but that would require a phone/text verification as well.
I then setup alias addresses on the account that I use for elsewhere on the web. That way, if someone compromises some site, they're not going to have a valid email or password to use for the account. (As a side note but not necessary for daily use, I have 5 passwords that I cycle through for most things, but for sites with low security, I use a random password... I use LastPass to help me manage things.)
I sync all of my stuff to the phone and my laptop via SkyDrive through that same account. Because I run Windows 8 and Windows Phone, I can initiate a "remote wipe" if they're ever lost or stolen... but I won't lose the data, because it's all on SkyDrive as my backup.
Bottom line... I'm protected on the devices by strong password protection AND remote wipe features in Windows 8 and Windows Phone. I'm protected online, because I don't use the same email for the master account that I use for online sites.
And it's super easy to setup through Outlook.com. Register a single master account, go to options and setup as many aliases as you like (I have two... personal for family/friends, and public for websites/e-commerce). From there, on your favorite sites... update the email addresses to your public one.
As for contacts/data... it's a very simple task to upload to Outlook.com, and you'll ask yourself how you managed to get by with such manual, one-device limitations before.