Turning on encryption for an Android 4.0 device
In Honeycomb the option is in Settings -&gt; Location and security.  In Ice Cream Sandwich it's at Settings -&gt; Personal -&gt; Security -&gt; Encryption.

If you're wondering about how Android does encryption, take a look at this: http://source.android.com/tech/encryption/android_crypto_implementation.html

Naturally encrypting and decrypting requires some overhead, but I wouldn't expect it to be too bad.  Undoing encryption does require a factory reset, so if you're doing it "just to try" you may want to do a backup first.  If you're worried about security then I would definitely advise you to use it.