Changing output to 1080i is the worst of all worlds.
A typical "upscaling" process works like this: 576i deinterlaced to 576p, 720x576 resolution changed with interpolation to 1920x1080 pixels, reinterlaced for output as 1080i. Then your display may only display 1080i as seperate fields of 1920x540 pixels if it cannot deinterlace 1080i properly, and other issues can happen too. Note that the same deinterlacing problems from the stb's built in chipset (moire in film, combing in video) continue to appear but are compounded by the additional video processing steps.
So, no ... it's not better.
To answer your question, the choice is not easy:
HDMI is clearest and sharpest picture but has horrible deinterlacing for SD, and judders and has all sorts of artefacts going on.
Scart (RGBcvS) is blurry but your display will probably do a better job of handling it.
Component is easy to use, like HDMI, because no need to change inputs on the display when you switch from SD to HD channels and vice versa. Although component HD is very good, and not too dissimilar to HDMI the SD is similarly soft as scart.
I'd go for component for ease of use, but to check which is better component/scart go to the main Sky menu and look at the coloured square boxes at the bottom and look for colour bleed (this is something you don't want); on your old Sky+ these boxes would be razor sharp but on Sky HD they are softened.
Note: if you use component, you must have HDMI cable unplugged otherwise the component output for SD is the same 576p as HDMI -- do not use component for SD and HDMI for HD.
I do wonder if they deliberately soften the analogue SD output, although the new Sky HD boxes do not have component output anymore so we won't be able to choose if boxes need replacing.
StooMonster