Destiny – Should You Level Up Gear Before Dismantling?

The soft level capacity is at 20, yes. That means when you reach level 20, experience will no longer make you level any more. If you want to go past level 20, you'll need Motes of Light to buy equipment from the Speaker. This armor will have a stat called Light which determines how many more levels past 20 you can get to. Max level 32. This increases when new content is added to Destiny.

EDIT:
The class items bought from the Speaker does not give any stats. So the only way to get equipment with the Light stat is to kill enemies and hope for good equipment with the light stat. Only higher level equipment will have the light stat.

EDIT 2 (Feb 6, 2015)
Motes of Light are given to you when you accumulate experience after you've reached level 20. Equipment with the Light stat can be bought from the Vanguards and from Xûr. It can also be awarded after missions, strikes, raids, and battles in the Crucible/Iron Banner. The rarer the equipment, the more light.

UPDATE: (May 19, 2015)
With house of Wolves out now the new level cap is 34. You can use etheric light to ascend (upgrade) any of your old legendary or exotics though to catch up with the new gear and level cap. Get more info here: http://goo.gl/VPztvk

Update: (September 9, 2015)

With Update 2.0.0 the Character Level Cap will be increased to 40 on 9/15/15, and you no longer need armors' light stat to further increase your effective level. It's now purely EXP based. There is also now a gear score component, where each equippable gear piece's defense or a attack level contributes to your overall light level. This maxes out at 310, and is based on the average value (possibly with some weighting) of all of your currently equipped gear.

Update: (April 12, 2016)

Bungie released their Update 2.2.0 on April 12th, 2016. The Light Level was increased to 335; the maximum XP level still caps at 40

Update: (September 20th, 2016)

In the Rise of Iron Expansion, Bungie increased the maximum light to 385

What doesn't carry over (becomes a normalized amount)

• Base defense
• Base weapon attack

What does carry over

• Weapon progression (including damage bonuses)
• Armor progression (Including Defense bonuses)
• Abilities
• Character progression (stat upgrades)

This means that even though they are on relatively equal starting ground. A Level 20+ will have an advantage over a level 5, but not so much that the low level doesn't stand a chance.