HI, the flashing lights are most likely due to the build up of dirt or something around the plunger that puts the front diff into gear. Super select 4wd does need regular use to keep everything working properly and when I got mine i had flashing lights for a while, now with plenty of use it hardly flashes at all, if it does I chuck it back into 4wd then out again.
There can be other reasons such as faulty sender switches on the transfer box too.
With a couple of inch lift as SupraLux mentions bigger tyres are easy to fit, since you have a diesel and live near the waimak

then a snorkel is a good idea - jolly cheap insurance. By then you'll have quite a capable everyday vehicle.
Also Something to be weary of, factory tow hooks on many 4wd's are a bit doubtful, On Pajero's the rear one is a loop which is only welded on one side and the front one is a hook welded to the chassis, I wouldn't like to see a solid snatch of either of these, - results arn't worth thinking about.
cheers, Glen