Our house is 25 years old and the ceiling was varnished over natural pine. Would like to use a 1 to 1 white paint to water solution to lighten. Do I have to sand off or has it been long enough that finished has worn off enough?
Using a water-paint mix won't work. It will peel. Use a white wash wood stain, oil base.
To do this you will need to wash the ceiling to remove any dust and sand to roughen the surface, no need to totally strip off the existing finish. The hard part is getting the stain on even and not look bad, plus if a wiping stain is used it won't hide much of the existing color. You could try either a gel stain or semi-solid siding stain; Old Master makes a very good gel stain- color Pickling White, Cabot's has a semi-solid siding stain- color white.
There should be other products that will work, this is just off the top of my head.