Dear JC
happy Easter

I am rebuilding my 85 740T M46 Laycock overdrive, @240000miles, right now.
Tim's [reply] is right!!! Low press and a worn clutch would produce 'your' plus many more symptoms. If you can get the yellow light and put the OD in gear in other gears than Fourth, then you have an electrical problem also. Never go in reverse with the OD in gear. Major damage-maker. If your'e not sure, and have to back-up, don't use OD at all.
A rebuild is inorder, Volvo will do the complete job with all parts for ~$600. OEM parts at Volvo are ~$120 all seals and o_rings plus $252 for the cone-clutch, That's $370 for parts, plus you will need the thin 1"wrench [mentioned previously] strong needle-nosed pliers and a good-sized cresent wrench to get the caps off of the various ports containing filter,pump and relief valve. Nuts are metric on the Volvo and standard Ώ/2, 9/16 etc,] inside the British unit, so you need all the tools.
Paying some one $230 to do the job doesn't sound too bad when you are about halfway thru the project on your-own. Parts elsewhere are ~$90 plus$220 for clutch. That is then a $290 saving if you do it, v.s. Volvo.
It is not a good sign that some piece of metal fell out with plate removal, the first thing to come down should have been a screen filtering unit, all metal-pieces should have been above this screen.
You really need some on-site advice with this one, at least some good reference material to start with. On the web somewhere is a good review of the rebuild. Put into a net search-engine; laycock transmission or overdrive rebuild, and you should get alot of good info., including a much need expansion-drawing of all the parts involved. I have a Haynes volvo 740/760 book which is bearly Ok, but I have had experience with this stuff before.

Basically, until I got it rebuilt, I would drive in fourth all the time -except if you got the OD in-gear for the highway. Throw it out when deccelerating, use your brakes, they are actually designed for that purpose.
A junk-yard OD will need a Overhaul also. They want about $300, money better spent on one you know 'sort of works'.

Good Luck