OK so Ive bitten the bullet and purchased a second hand iPod 30Gb 5th Gen off FleaBay and it seems superb... playlists all work, shuffle works fine and can all be controlled from the car with the iPod safely stowed in the centre console.
This now frees up my phone to be used for more useful purposes such as Sat Nav, photos and, dare I say it, to make and receive phone calls!
As Kev says, the phone kicks in if a call comes in on Bluetooth, however the satnav I use (CoPilot Live) doesn't make any sound if I'm listening via ipod.
That said, I have contacted CoPilot support for a feature request that, even if the phone has a Bluetooth connection in place, that you should still be able to select how CoPilot outputs the sound (my car, iPhone speaker etc).
Hopefully this may appear at some point.
In the meantime I simply switch to Bluetooth when I'm nearing my destination to ensure I hear the final turns and simply keep an eye on the satnav when listening to ipod to see in advance where my next turn is.
The main difference is that you can use the scroll wheel to select any song from the list and the , once in the song list, use exit to go through the menu structure, allowing you to select playlist/artist/album etc. makes it so much more user friendly than the simple 'next song' option over Bluetooth.