This has got me a little further on, I have more options open to me in the crypto area of KMail setup, but I still have a problem with decrypting emails.
If I send an encrypted message to myself, all seems ok - it asks me which key to use and the email sends successfuly.
If I open the email in Evolution, I get prompted for a passphrase and then it allows me to view the mail. However, in KMial, it doesn't prompt for a password and I get the following message in the body of the email;
Encrypted message (decryption not possible)
Reason: Crypto plug-in "openpgp" could not decrypt the data.
Error: Bad passphrase