As someone with the pivot overlay type of ExtRoot - I can say, it is doable.
The only caveat is:
This means that after the sysupgrade you'll finish with the squashfs partition with your full set of the settings (i.e., including the settings of the software not present in the bootable partition - which was installed only on the overlayed space).
For me - it is OK, I have almost the same settings in the bootable partition and on the overlayed space.
But if you have different, say, /etc/config/fstab here and over there - your overlay may not automount - no big deal, though. Just restore your boot partiton /etc/config/fstab file as it was before the sysupgade. Or have it (fstab contents) the same in the bootble and on the overlay.
No need to re-do all the pivot overlay procedure again.
(Last edited by booBot on 19 May 2016, 18:01)