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I recently purchased version 20. Now I have received an email offering a free upgrade to version 21.
I am wondering if I need to uninstall version 20 first, or if I can simply overwrite it by installing version 21?

Both are separate versions so you can have both installed at the same time. But with that said if you prefer you can simply remove version 20 and install version 21.

I suggest to keep the previous version installed for a few weeks, just in case something works different.
Then you can compare the settings.
If everything works fine, then you can remove the 'old' version.