The preparation needed really depends on the condition of your existing paint. If you don't have a stable surface to paint over, then you'll end up with a poor result. If paint is beginning to split, crack and curl, it will need to be sanded. - Jason
Remember you do not need to remove all of the paint, just the damaged and flaking portions of it.
Any paint that can just be peeled off needs to be removed as it is not bonded to the underlying layers sufficiently. If you can feel the edge of the paint with your finger and it has a thickness to it then use you will notice the transitions after applying additional coats of paint. If you can't remove all the paint then I would certainly sand those transitions to minimise them showing through after recoating.
120 grit sandpaper will remove material faster but 180 grit will leave fewer visible scratch marks in the timber/coating. If you were to only apply a topcoat over the sanded areas then I would suggest 180 grit or even 240 grit so the sanding marks don't show through it. But if you are going to undercoat before the topcoat, 120 grit should be fine. An undercoat is usually recommended once any flaking paint is removed and sanded smooth as it will seal and bind the rest of the existing paint. - MitchellMc