Thankyou so much for answering my questions.
Through the process of trying different things out and getting some advice from the RoR irc chatroom I have managed to get all this working last week.
I ended up having to use a self related model for collections and building a selection of methods to allow me to navigate up and down the hierarchy and get parents and children etc. I then used a nested resource to put albums under collections.
So my routes are now as follows:
/collections => See all root collections
/collections/12 => See collections which are children of collection 12
/collections/45/albums => See albums which are children of collection 45
/collections/45/albums/2 = See album 2 of collection 45
I then added 1 extra route as /albums just to give a gigantic index page of all albums which also works perfectly. Not going to link explicitly to this page but it's there if someone stumbles across it.
I hope I explained it all ok.