I would say that if you want it to be practical, keep it roughly as it is - these old bikes are
practical! Upright, comfortable, hub gears, full mudguards, BB grease nipple...
Two upgrades that I personally would consider are:
1. Aluminium wheel rims - on this bike they will be 26x1 3/8 or 590mm (not to be confused with 26"x1.xx or 559mm, which is standard mountain-bike size and NOT interchangeable) - for more info look here http://sheldonbrown.com/26.html
The reasons for upgrading to aluminium rims are twofold. Firstly, they're a hell of a lot lighter. It'll never be a light bike, but this is one upgrade that you'll definitely notice. Secondly, the braking, especially in the wet, will be massively improved. You're unlikely to find any aluminium 26 x 1 3/8 rims that can be used with rod brakes - you'll have to upgrade to normal rim brakes. You'll likely find that the mudguard mounting holes can be used for mounting long-drop dual-pivot calipers (I have used Alhonga ones in the past - they're pretty good for the money), and you'll need to get some new brake levers, too. I have upgraded a few old rod-braked roadsters in this way and it really does make a massive difference.
Archie Wilkinson sell aluminium 26 x 1 3/8 rims in a variety of colours, including silver. They also sell complete wheelsets for £70, I think, which is a bargain - although they are singlespeed (which is an option if you live in a flat area). Raleigh still make them, too.
2. A full oil-bath chain case - I am surprised that it doesn't have one (or at least a hockey-stick chainguard) - perhaps it was damaged and discarded at some point. This will completely protect your drivetrain from dirt, grit and grime. Combined with steel chainrings, all you'll need to do is dribble some fresh oil on the chain every six months or so, and it'll give perfect service whilst keeping your trouser-leg clean. A hockey-stick style guard will protect your trousers from grime if you'd prefer not to fit a full chain case.
Other than that, I would leave it as it is. You could fit square-taper cranks if you wanted - it should just need a different axle. There's not much point though - it'll look incongruous and these bikes will never be light. What lighting system is on it, a Miller dynamo?