When you encrypt a phone ALL the data on the phone is hidden/scrambled so to speak, making even common text unreadable, unless it is decrypted with a password first. So any photos, emails, text messages, can not be seen, even if they are taken off an SD card (if the SD card was encrypted as well).
But say you encrypted the phone and NOT the SD where you stored all your naughty pictures. Well anyone who has you phone, will not be able to view anything on it, BUT if the take the SD card and put it in a computer or another phone, they can do what they want with the unencrypted files on the SD card.
It is an extra step of security, an option for those that want or need it.
It would not be for the user that can't remember a password that they changed and confirmed, 10 mins later for their lock password (as seen on many many Yahoo Answer questions).
Does it effect performance? It can on some phones. The more data that has to be encrypted and unencrypted each time you want to view or use it, can slow down some phones, but not enough to matter a lot when security is the main focus for encrypting it in the first place.
"You can't decrypt your phone except by performing a factory data reset", while this is true, if the goal was to get at the data on the encrypted phone, then having it encrypted, has more than served it's purpose, should the phone be lost or stolen.