Is S/MIME in iOS 7 buggy?
You need to have, installed on your iPhone, the public key of the person you intend to send an encrypted message to.

Mail.app on OS X imports the certificates of people who send you mail, automatically. On iOS, you have to do it manually, unless your iPhone is part of a corporate deployment.

It's easy! Simply find an email the recipient has sent to you, tap the checkmark icon next to their name, tap "view certificate", and tap "install".