You can't update the phone directly over the web from the phone settings until AFTER iOS 5 is installed. The current version is iOS 5.1.1. Connect your phone to iTunes and on the Summary page of your device select "Update".
Have no idea what you mean by "it won't go to the phone until I update." WHAT won't go to the phone?
You need to download and install the latest version of iTunes on your computer before you can update the iPhone's iOS.
When you have the iTunes installed on your computer, connect the iPhone to your computer and copy any purchases off phone via File > Transfer Purchases (you may also want to copy photos off the iPhone as well) and then force a backup of the iPhone by right-clicking the iPhone 'Device' on the left-hand side of iTunes and selecting 'Backup'. You may also want to copy off the iPhone any important documents, notes, files etc e.g. via the file sharing section at the bottom of the device's apps tab when connected to iTunes, via wifi, email, dropbox etc - they should be included in the backup, but it's best to have a copy of them outside of the backup just in case.
You can then start the update by selecting the iPhone on the left-hand side of iTunes, and on the Summary tab on the right-hand side clicking the Check For Updates button.
Updating to iOS 5+ : http://support.apple.com/kb/HT4972