Basically it works like this.
When you buy a game and register the code, you are given Play Access Right to play on what ever system you bought the game for. Any system you want to play the game on your account need Play Access Right for it.

When you go for the upgrade PS3>PS4, they are basically stripping your Play Access Rights for the PS3 and giving you it for the PS4.

Your characters and everything else is account bound, its useable on any system you have Play Access Rights to.


That said , they say the if you want to on both PS3 and PS4 you need to not use the free upgrade and Buy the PS4 version. So using the upgrade might permanently lock you out of playing on the PS3, even if you buy it again for that system.