In small doses ferric salts in the water are not harmful - they probably pass straight through but any that doesn't should help you avoid anaemia. There is some evidence that digesting ferric salts in a strong, pure form can cause constipation and generally vague gut upsets ... but you would notice that ....
Yes, it would be better to replace the pipes although with what - lead, toxic plastic? I think the thing is to flush them out regularly in the morning before you use the water for drinking. Certainly won't harm you to wash or bathe in it - might give you a pseudo-sun tan!
