A bookcase facing the Living Room or a really cool contemporary railing. The step down is interesting and you don't want to raise the entire floor for one step.

If you can raise the floor it will give you more options for your front entrance, because even if you replace the railing it is still a tight entry.

If you raise the floor you will have the Windows below your kneecaps ? And you can't use the space below the window ...unless you make it a floor to ceiling window ( garden door with a patio in front of it . I would use a plain wall divider with a little 10-20 inch top where you can put your keys ..and leave it ..but ..you are right ...you need a divider ..just not the one you have . A white wall , dry wall divider would be better even higher than it is now ...TO DIVIDE the entrance from the living area !
and you can hang a painting from the living room wall....facing the living room ..good luck !

I agree with the 1/2 wall height bookshelf to the living room idea, which would give you a ledge for a decorative bowl for keys, etc. I would enamel the bookshelf.

Also, if you feel like your entry is tight, you could build your foyer platform a little wider (4-8" might make a big difference) before adding the bookshelf, but you would need to either find matching flooring or redo it. If you do this, just watch your spacing between the bookshelf and the window trim. If you don't have a carpenter, maybe you could try an IKEA Billy bookshelf hack (google or look on Pinterest). Just make sure it's secure in case people lean on it.

Raising the floor will cause a host of “begats” - the things that happen because of something else. Think windows, electrical outlets, transition to other rooms, etc. Keep it simple - either a pony wall or a good looking railing.

you will lose space in your stepdown room if you use a pony wall. not sure how much you have there now. on the plus side you'll have some surface. a pony wall is 4" deep but a bookcase is 8-10" deep, so that chair won't fit there any more.

Just get a new straight white wood railing from a big box store. That's the simplest solution--minimum of expense and hassle. The advantage is that you keep the openness and airiness of a railing that you wouldn't get from a pony wall or the bookcase, though I liked that idea. But since you say you don't have the space for a bookcase, then a straight white railing will change the look.

If you're looking for further updates, think about new, straight hanging drapes rather than the swag curtains, which do date the room. Here are some curtains that are kind of a reverse pattern to your chair and would play off each other.

Thanks everyone!!!
The whole space is being redone.....flooring, curtains, furniture. We are just moving in to this house.
The railing does make it feel open, I was worried a pony wall will make feel tight and closed off.

Would a 3/4 book shelf where the chair is make it feel closed off as well?

I like the idea to paint the banister white and put book shelves in the living room side. Put some plants on top maybe.

Oh my other plan was to open up the hallway cupboard put a bench in there.

Wait until you move in to make some of your structural changes. Post again when you're ready, but do give all your information upfront since we didn't know this was someone else furnishings, colors, etc. All the details relate, so when commentors post, they try to take into account surroundings. You could definitely just paint the railings white for now then see how the entryway feels after you live with it for awhile. For example, you might want to keep the closet and put a bench against the railing. Sometimes you don't quite know what you need until you live in a place.

Other things to consider - Change the swing of the door so it opens on the railing side. You'd put a hinge on it, so that it does not hit the railing.

Update the railing to something sleeker - like these.

Put in a sleek new railing painted pale grey to match walls. Is that a red door matt? Get rid of all flooring and put in wood or wood look floors. Get rid of those “drapes” and the chair. Built in bench (with storage), ends of bench are free to act as end tables. Medium plant on end next to wall. Top off with a crystal chandelier in entry area. Trade the closet doors for paneled doors. In the space between the door and closet, hang two white framed, grey matted black and white prints or photos. Very elegant.

You can replace the banister with a more current style banister or a pony wall, but I think a simple banister in metal or wood would be better than a pony wall.

Do not raise the floor. I would update by enlarging the area by about a foot. removing the railing and installing shelves that face the living room and design an entry area on the door side for a place to put stuff while you hang up coats and that includes shoe shelves and a small chair for removing shoes and boots.