Could the increase in the electrode gap in the spark plug cause wear on the ignition coil/charge distributor?
Increasing the gap on spark plugs does cause wear on the all the parts you mention. I wrote this answer some time ago which I believe answers this question.
Will retarding the timing cause any damage to the internals of the engine?
In and of itself, no, other than the possibility of carbon buildup due to reduced burn efficiency. This isn't really damage, though. It can be cleaned out by any of several methods.
Doesn't the engine knock because the lower grade octane fuel ignite before the piston reaches TDC how does retarding the timing solve this issue, shouldn't it be the opposite?
Knock is pre-ignition. This is the air/fuel mixture combusting before its time which causes the burning fuel wave front to hit the top of the piston as the piston is still traveling up the cylinder towards top dead center (TDC). Pre-ignition in most cases is caused by hot spots in the cylinder causing the dastardly deed. This is quite often carbon build-up which holds enough heat during combustion, carries it over to the next compression cycle.
With lower or higher octane fuel, as the octane number increases, it becomes harder and harder to burn. This helps prevent pre-ignition.
Retarding the timing is moving timing closer to TDC towards the end of the compression cycle. Advancing the timing is moving back from TDC, earlier in the compression cycle. Due to the length of time it takes the air/fuel to burn after it's ignited, it is ignited prior to TDC, giving it time to burn and gain peak combustion, which then forces the piston down. When pre-ignition occurs, there are two colliding wave fronts plus ignition happening too soon, causing all sorts of little nastiness. This also tries to stop the piston from traveling up in the cylinder the rest of the way, which causing the knocking sound you hear. This can cause damage to an engine. With today's extensive use of hyperuetectic pistons, shattering them is not out of the question if the pre-ignition is severe enough.
You may have heard the term of "pulling timing" in modern fuel injected cars. This is done when the knock sensor(s) hear the ping from pre-ignition. Pulling timing is in actuality retarding the timing. In doing so, the engine is firing the air fuel mixture later which can help prevent pre-ignition, but only to an extent. If, as I've stated above, the pre-ignition is caused from a hotspot, you can pull as much timing out as you want to and the engine will still have issues (this is where dieseling a gasoline engine can happen). Dieseling is where an engine will continue to run on, even after it is shut off. Dieseling only occurs with carbureted engines, as when a fuel injected engine is shut off, so are fuel injectors, which is the source of fuel. Carbs will continue to flow fuel as long as there is air being introduced through the venturis and there is gas to be given in the float bowls.