Pick up only item - buyers has paid on paypal

[DillyDallyDayDream]

Title says it all, can i refund money and ask for cash on collection?
Also paypal are holding money for 21days can i get round that?

yes you must refund - cash only for collection, never ever paypal

I don't want to seem dense but why is this? Is there a risk they'll withdraw the paypal payment after pickup?

yes - they can pretend not to receive, and with no online proof of delivery, paypal will give the buyer back all their money and seller hasn't a leg to stand on.