You can definitely encrypt your LOS device and update it (manual or OTA) just fine. I have a Nexus 6 and have been doing it for months now, both with official builds and a custom build I was doing.
I have an encrypted S5 with LoS. I believe autoupdate just doesn't work on it with TWRP period, but it might be because of the encryption. Either way, I just download updates once a month and sideload them.
ah maybe this is was my issue, I was only trying with TWRP and it always failed (I tried last time May this year).
I have an encrypted LineageOS device and can update it just fine.