I've been using the Magic Keyboard w/Office apps with no problems for months now, trackpad included...am I missing something?
Use Pages or any of the many third party apps that have been maintained with iPadOS 14 in mind, and then switch over to Word. Yeah, the MKB works, but the cursor doesn’t change to the vertical bar, you can’t select text by dragging, etc.
I use OneDrive heavily, so I’ve made it work, but it has not been a good experience compared to other apps.