I wasn't planning on installing Lion in a separate partition.
Why would I want to install Lion in a separate partition? This would also mean that I would have to install all of my applications again too. And why would I then uninstall PD4 from my Snow Leopard install, and not the entire Snow Leopard partition?
I am curious to know why you recommend this
It's more of an option than a recommendation.
One reason to install an OS to a new partition is to keep things fresh. Sometimes it's safer to start from scratch. It may help to solve problems to know that you started from a known baseline. A clean install means that the partition would not have things (apps, logs, preferences) that you no longer use. It also means that the partition doesn't have old things that you're going to replace with new things (e.g. it won't have PD4 so you don't need to worry about how you perform the upgrade process to PD7).
One reason to keep an old OS is if you have old applications that will not run on the new OS or that have compatibility problems with the new OS. For example, Lion doesn't run old PowerPC only applications. If you're a developer then you would keep the old OS for testing purposes. If a new OS becomes un-bootable, then you can boot the old OS to run any application that doesn't exist on the Mac OS X Installer DVD that you might want to use to fix the new OS.
I keep my apps and documents on a separate partition if they don't need to be on the startup partition. I keep every old OS that still works on the computer. They each only take 20-30 GB of space after moving any applications and documents to the new OS's partition.
You would uninstall PD4 to save space once you determine that PD7 on the latest OS will run all the Windows applications that you use. You would keep PD4 if it has better support for old Windows OS's that you might need for testing purposes or for old software that you acquire in the future. You could uninstall PD4 anyway, and install it to a Snow Leopard partition later if you need it, as long as you keep the installer somewhere (which is what "tuck it away somewhere safe and offline" means).
If you don't want a clean install of Lion (because you don't want to reinstall your apps or re-setup your preferences) and you want to keep Snow Leopard then you have two choices: you could upgrade your existing Snow Leopard to Lion and install Snow Leopard to a new partition or you could clone your Snow Leopard partition to another partition and upgrade one of them to Lion.
There's a KB item for upgrading to Lion:
http://kb.parallels.com/en/111621
It says upgrade to PD7 first, then upgrade to Lion.