Bit of a tough one, in my opinion I wouldn't cancel it.
If he had asked you beforehand to not go through eBay and pay cash on collection (as if you're buying from the adtrader, Gumtree etc) - passing on some of the saving to you - that's a different story. I've done that before when buying.
However, you're getting no perk out of his request other than losing the backup of a PayPal claim should you need it.
He might be covering his backside as it's a common scam to pay via PayPal and then go collect. PayPal often take the buyers side in a dispute as the seller can find it hard to prove it was 'dispatched'. Thus if the auction is cancelled, there's no comeback from the buyer.