How to upgrade Android on the Samsung Galaxy Ace I have an Samsung Galaxy Ace that came preinstalled with Android v2.3.4 (Gingerbread I believe)

I've searched the internet everywhere and couldn't find a way to do so that gave clear instructions on what to do.

But I would also like to ask, if I was to update to say 4.1 (the latest I believe) would the phone then start to lag as it is not such a powerful phone. (800MHz CPU + 300MB RAM)

Thanks heaps!
You certainly can upgrade your OS, although the process isn't without risk.

There's an entire board devoted to the Galaxy Ace at xda  - here's a good post which should get you started.  From the quick skim I've done over a few posts there seems to be a massive warning of not to use ROM Manager (a popular tool in the ROM community) as it'll brick your device.  

Once your device is rooted you can then install a ROM - here's a link to a Cyanogenmod 10 based ROM for the ace running Android 4,1, I think.  Be careful to read the instructions and take note of the stuff that doesn't work. If you get stuck - there's lots of help out there

Good luck.