Sportal.co.nz 09.Feb.2013Getty Images
The 32-year-old has been limited to four appearances, three off the bench, since joining Glasgow Warriors last summer following a spell in Japan.
MacDonald, whose two All Black appearances came in a tour of Britain in 2005, said: "It's a decision every pro athlete has to make at some point and it's one that has come a little earlier than I would have liked due to the nature of the injury.
"It would have been nice to have played for a few more years but it's come to the point where the injury is affecting me day to day with my mobility and everyday life so I've taken the decision that will give me the best chance of a full recovery.
"I'm gutted that I've not been able to pull on the jersey more often for the Warriors but I'd like to thank for the club and Scottish Rugby for the opportunity to play here."
The former Auckland player, whose father Hamish also represented the All Blacks, added: "I'm very thankful to have had the career I've had and to have been able to keep playing until I'm 32.
"I've played for some great teams and met some great people and had good fun along the way so there are moments that I'll treasure.
"I'm going to head back to New Zealand for a few months as I've been away from the country for five years but I've no doubt I'll come back and cheer on the boys at Scotstoun in the not too distant future."
Warriors head coach Gregor Townsend said: "I'd like to thank Angus for his time here at Scotstoun.
"It's obviously been a difficult time for him with his neck injury and we never really got to see the best of him, but throughout his time here he has been nothing but a true professional."